Role of Online PlatformsTechnical ReportDG CNECTX/XX/2016
Table of Contents
I. Online platforms and the Digital Single Market ...... 8 1. The emergence of the platform economy ...... 8 1.1 Definition(s) of platforms in economic literature ...... 9 - Multi-sided markets ...... 9 - Platform operators facilitate interaction between users ...... 11 - Platforms vs resellers: extent of control over sales conditions and direct interaction between sellers and buyers ...... 12 1.2 Drivers of the growth of online platforms (input from JRC report, G. Parker slides) ...... 14 - Economics of online platforms business models ...... 14 - Ubiquitous connectivity (statistics on boroadband and smartphone usage in the EU) ...... 22 1.3 Benefits of online platforms ...... 22 - For consumers ...... 22 - For businesses ...... 22 1.4 Europe’s position in the platform economy (based on Evans/Gawer report) ...... 22 - Usage of online platforms in Europe ...... 23 - EU-based online platforms – global comparison ...... 23 - Online platforms and jobs in the EU ...... 23 2. Analytical framework for policy questions on online platforms ...... 27 2.1 Methodology (based on TNO, Ecorys, IViR study) ...... 27 - Specific types of platforms have different roles / raise different regulatory challenges ...... 27 - Platform characteristics as starting point for analysis ...... 28 - Linking of key characteristics to policy issues ...... 28 - Review of the legal framework applicable to each issue ...... 28 - Basing policy recommendations on evidence of existing problems ...... 28 2.2 Policy background ...... 28 - DSM priorities ...... 29 - Europe’s position as a world leader in the digital economy ...... 29 - Fair competition ...... 29 - Consumer protection ...... 29 - Personal data protection ...... 29 - Other horizontal objectives ...... 29
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- Sectoral policy goals ...... 29 2.2 Categories of online platforms covered in this report(based on P. Evans database) ...... 30 - Online advertising platforms ...... 30 - Search ...... 30 - Marketplaces ...... 30 - Social Networks ...... 30 - Mobile ecosystems and app stores ...... 30 - Payment systems ...... 30 II. Main types of platforms: key characteristics and associated issues ...... 30 1. Online advertising platforms ...... 30 1.1 What are online advertising platforms? ...... 30 1.2 Main players in the EEA ...... 31 1.3 Market trends ...... 31 1.5 Market structure ...... 33 1.6 Impact of online advertisement platforms ...... 33 1.7 Key characteristics relevant for policy ...... 34 - collection and use of personal data ...... 34 - auction-based sales of ads, pricing ...... 34 - importance of access to advertising networks for publishers and suppliers of goods / services34 1.8 Key issues ...... 34 - privacy, ...... 34 - transparency regarding use of personal data, ...... 34 - high cost to sellers ...... 34 2. Marketplaces and e-commerce ...... 35 2.1 What are online marketplaces? ...... 35 2.2 Main players in the EEA ...... 36 2.3 Business models ...... 37 2.4 Market structure ...... 38 2.5 Impact of online marketplaces ...... 39 2.6 Key characteristics relevant for policy ...... 40 - collection and use of data, ...... 40 - sales of third-party goods / services, ...... 40 - distribution of risk, ...... 40 - vertical integration of some players, ...... 40
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- differential pricing (based on profiling) ...... 40 2.7 Key issues ...... 40 - privacy ...... 40 - transparency of terms and conditions ...... 40 - transparency of data collection and use ...... 40 - responsibility / liability ...... 40 - risk of discrimination ...... 40 - risk of discrimination of customers based on data (lack of transparency) ...... 40 3. Internet Search Services ...... 43 3.1 Main market players ...... 44 3.2 What are internet search services ...... 44 3.3 What are the business models of search services ...... 46 3.4 Sectors or market segments of search services ...... 47 3.5 Key characteristics relevant for policy ...... 54 - high market concentration, high economies of scale, ...... 54 - role in access to information about products / services / politics, ...... 54 - vertical integration of main players, ...... 54 -collection of personal data, ...... 54 - collection of commercial data, ...... 54 3.6 Key issues ...... 54 - transparency of search results (involving paid for links and/or advertisement) ...... 54 - transparency with regard to collection and use of data, ...... 54 - bottleneck: access of suppliers to consumers, ...... 54 - risk of discrimination, ...... 54 4. Social Media Platforms (ALASTAIR) ...... 54 4.1 What is a social media platform ("SMP")? ...... 54 4.2 Main players in the EEA ...... 55 4.3 Business models ...... 57 4.4 Market structure ...... 64 4.5 Impact of Social Media Platforms ...... 66 4.5 Key characteristics relevant for policy ...... 68 - strong direct network effects, ...... 68 - collection and use of personal data, ...... 68 - filtering and recommendation of content (feeds), ...... 68
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- role of UGC – user generated content ...... 68 - vertical integration, ...... 68 - platform for other services (through APIs) ...... 68 4.6 Key issues ...... 68 - high switching costs for users due to network effects, ...... 68 - lack of transparency on data collection, ...... 68 - presence of illegal / pirated content, ...... 68 - access to data (API), ...... 68 5. Mobile Operating Systems and App Stores ...... 70 5.1 What are mobile ecosystems and app stores ...... 70 5.2 Main players and market structure ...... 75 5.3 Market dynamics ...... 79 5.4 Vertical integration of mobile ecosystem operators: app stores ...... 82 App store ...... 83 5.5 Impact of the emergence of mobile ecosystems and the App Economy ...... 87 5.6 Key characteristics of mobile ecosystems ...... 88 - high market concentration, ...... 88 - high indirect network effects, ...... 88 - high economies of scale, ...... 88 - vertical integration of most ecosystems, ...... 88 - data collection, ...... 88 - high number of small app developers, ...... 88 - platform for other services (apps) through APIs ...... 88 5.7 Key issues ...... 88 - potential dominance, ...... 88 - access to APIs and app stores, ...... 88 - privacy, ...... 88 - discrimination in favour of own services, ...... 88 - commercial data collection ...... 88 6. Payment systems ...... 89 6.1 Description of the main players ...... 92 6.2 General description of the business model ...... 92 6.3 Description of market dynamics ...... 92 6.4 What is the impact of this / these platform(s)? ...... 92
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6.5. Key characteristics relevant for policy ...... 92 6.6 Key issues ...... 93 - security ...... 93 - collection and use of data ...... 93 7. Collaborative economy ...... 93 7.1 What are collaborative economy platforms? ...... 93 7.2 Main players in the EEA ...... 94 7.3 Business models ...... 95 7.4 Market structure ...... 95 7.5 Impact of collaborative economy platforms ...... 96 7.6 Key characteristics relevant for policy ...... 96 7.7 Key issues ...... 96 8. Creative content ...... 98 A. Description of the main players ...... 98 B. General description of the business model ...... 105 C. Description of market dynamics ...... 105 D. What is the impact of this / these platform(s)? ...... 106 E. What are the main concerns specifically associated with this type of platform ...... 106 8.1 Description of the main players ...... 107 8.2 General description of the business model ...... 108 8.3 Description of market dynamics ...... 108 8.4 What is the impact of this / these platform(s)? ...... 108 8.5. Key characteristics relevant for policy ...... 108 8.6 Key issues ...... 108 III. Issues raised by online platforms ...... 108 1. Europe’s position as a leader in the digital economy ...... 109 1.1 Online platforms bring benefits to EU consumers ...... 109 1.2 Online platforms facilitate access to consumers for businesses ...... 109 1. 3 Online platforms are important for innovation ...... 109 1.3 Lack of successful online platforms as a threat to EUs leadership in the data economy ...... 109 1.4 Challenges limiting growth of online platforms in the EU ...... 109 1.5 Current strategies: DSM, SMS ...... 110 1.6 Conclusion ...... 110 - limit fragmentation, ...... 110
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- DSM initiatives important for online platforms: digital contracts, digital skills, free flow of data etc...... 110 - increase legal clarity / guidance ...... 110 2. Fair competition and B2B relations ...... 110 2.1 Online platforms and market power (overview of relevant literature: JRC) ...... 110 2.2 Significance of data and algorithms ...... 110 2.3 Access to online platforms (interoperability, open / closed platforms) ...... 110 2.4 Discriminatory conditions of access for suppliers ...... 110 2.4 Unilateral imposition of terms & conditions due to strong bargaining power of online platforms ...... 110 2.5 Constraints on the ability of individuals and businesses to move from one platform to another ...... 110 2.5 Bargaining power of online platforms – unilateral imposition of terms & conditions ...... 110 2.6 Regulatory level playing field (sectoral legislation) ...... 110 2.7 Protectionist / disproportionate local and national restrictions on collaborative economy 111 2.8 Existing regulation regulatory framework ...... 111 - Competition law – Art 101, 102 ...... 111 - Competition sector enquiries ...... 111 - Arbitration mechanisms – examples ...... 111 - Services Directive ...... 111 - Ecommerce Directive ...... 111 2.9 Conclusion ...... 111 - a “more technological approach” to competition policy – increase capacity of competition & data protection authorities to understand data / algorithms, ...... 111 - encourage platforms to offer access in all Member States – facilitate entry, ...... 111 - Alternative Dispute Resolution for small businesses, ...... 111 - continue review of sectoral regulation – media, transport, hospitality etc– to create a level playing field, ...... 111 - enforcement of data portability under Art 18 of GDPR – necessary to define “personal data”) ...... 111 3. Consumer protection ...... 116 3.1 Transparency of terms and conditions ...... 116 3.2 Trust in review mechanisms ...... 116 3.3 Responsibility of platforms for third party content / offers ...... 116 3.4 Existing regulatory framework and its enforcement ...... 117
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- Consumer Rights Directive ...... 117 - Unfair Commercial Practices Directive – are the obligations implemented effectively in all member states? ...... 117 - International Consumer Protection and Enforcement Network (ICPEN) ...... 117 - CPC Network ...... 117 3.5 Conclusion ...... 117 - clarification / guidance on the application of consumer protection legislation, ...... 117 - need to encourage online platforms to formulate their terms and conditions upfront, clearly and succinctly – eg. Which? Campaign in the UK) ...... 117 4. Personal data protection ...... 117 4.1 Use of data by online platforms ...... 118 4.2 Benefits of data collection to consumers and online platforms ...... 120 4.3 How data affects market competition ...... 125 4.4 Transparency and consumer trust regarding the collection and use of personal data ...... 126 4.5 Current regulatory and enforcement framework in the EU ...... 126 - ePrivacy Directive ...... 126 - GDPR ...... 126 4.6 Conclusion ...... 126 - work with platforms to improve accessibility and presentation of information ...... 126 - improve enforcement capacity (strengthen EDPS – data “watchdog”) ...... 126 5. Illegal content and copyright ...... 127 5.1 Presence and treatment of illegal content on online platforms (evidence) ...... 127 5.2 Presence and treatment of pirated content on platforms (evidence) ...... 127 5.3 Existing regulatory framework and its enforcement ...... 127 - InfoSoc Directive ...... 127 - Ecommere Directive ...... 127 5.4 Conclusion ...... 127 - need to harmonize the Notice & Action procedure, ...... 127 - clarify concepts in ECD based on ECJ rulings: “actual knowledge”, “hosting, mere conduit, caching” ...... 127 6. Cybersecurity ...... 128 7. Other horizontal priorities (which and why these?) ...... 128 8. Sectoral priorities (model analysis based on the media sector [safe outside of the collaborative economy area dominated by GROW], what else?) ...... 128 Annexes ...... 128
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I. Synopsis report on public consultation results ...... 128 II. Report on Eurobarometer results ...... 128 III. JRC Study ...... 128 IV. List of expert workshops: JRC, EPSC hearings etc ...... 128
I. Online platforms and the Digital Single Market
1. The emergence of the platform economy
Information and communication technologies (ICT) have brought about fundamental changes to the world we live in. The internet revolution has led to the emergence of online communities which engage in communication and trade. With the advancement of smart mobile technology, our access to and interaction with the "online world" becomes ever more pervasive. Even though only about 20 years have passed since the start of the internet revolution, the expansion of the "online world" has given rise to tremendous changes in countless economic sectors and in many aspects of social life. The opportunities that the "online world" offers foster the emergence of new businesses and contribute to the growing digitalisation of existing ones.
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Online platforms (e.g. search engines, social media, e-commerce platforms, app stores, price comparison websites and ad networks) are playing an ever more central role in this "online world" and hence in social and economic life. They enable consumers to find online information and they allow businesses to exploit the advantages offered by e-commerce. By 2015, listed "online platform" companies worldwide had a market capitalization of USD 3 trillion.1 There are 1 million people directly employed by publically traded online platforms. That number indeed even excludes individuals that are not directly employed by platform companies, such as Airbnb hosts and third-party application developers.2
The growth and importance of online platforms has indeed been widely recognised and their role in society has been the subject of in-depth assessments by numerous regulators across the European Union.3
1.1 Definition(s) of platforms in economic literature
Platforms have existed for millennia, for instance as local newspapers or village market places. However, the recent spread of information technology and the Internet revolution have led to an unprecedented expansion of platform business models which take advantage of the digitization of the economy, improvements in telecommunications networks and increasing penetration of devices connected to the Internet. There has also been a noticeable increase in the academic interest in the subject of platforms and multi-sided markets.
Although differences of opinions persist regarding their relative importance, there seems to be a general consensus on two key elements, which characterize platform markets4:
(a) Platform markets are multi-sided; (b) Platform operators facilitate interactions.
These characteristics are discussed in turn below.
- Multi-sided markets
1 Center for Global Enterprise, Global Platform Database, 2015, as cited by Evans, P, Reflections on the Boston Platform Strategy Summits, Center for Global Enterprise available at:
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In economics, platforms are generally known as "two-sided" or "multi-sided" markets where users are brought together by a platform operator in order to facilitate exchange of information and transactions. In the context of digital markets, depending on the business model of the platform, its users can be buyers of products or services, sellers, advertisers, audience, software developers, social media users, etc. As opposed to the conventional "pipeline" business model where the value is generated by the supplier of a product or a service, a large part of the value derived by users of online platforms is created by other users.
Network effects In economics and business, a network effect (also called network externality or demand-side economies of scale)5 is the effect that one user of a good or service has on the value of that product to other people. When positive network effects are present, the value of a product or service increases with the increasing number of other users. Direct network effects apply to the same group of users (eg. users of telephone network). Indirect positive network effects exist where users of one group benefit from an increased presence of users from a different group (eg. sellers on an online marketplace benefit from a higher number of buyers). Economic models of platform markets or multi-sided markets (“MSM”) emphasize that relatively strong indirect network effects which exist between at least two distinct groups of users are an important feature distinguishing platforms from one-sided markets. The indirect network effects are not required to be equally strong in both directions. This means that one side can benefit more from the interaction than the other, which may be reflected in asymmetric pricing.
At least one of the groups clearly benefits from increased presence of the other The strength of indirect network effects is an important factor distinguishing platforms from other types of markets6. Single-sided markets have no or very weak indirect network effects between the different actors in the value chain. For example, buyers of a car do not benefit from an increase in the number of companies supplying components to the car manufacturer. Most of the profits from an increased number of viewers of a movie go to the movie producer and not to the suppliers of filming equipment. In contrast, platform markets are characterized by the presence of strong indirect network effects where the increase in the number of users on one side of the market translates into direct benefits for the other side.
5 Debate as to whether the terms "network effects" and "network externalities" can be used interchangeably or not. http://wwwpub.utdallas.edu/~liebowit/palgrave/network.html “Network effects should not properly be called network externalities unless the participants in the market fail to internalize these effects. After all, it would not be useful to have the term ‘externality’ mean something different in this literature than it does in the rest of economics. Unfortunately, the term externality has been used somewhat carelessly in this literature. Although the individual consumers of a product are not likely to internalize the effect of their joining a network on other members of a network, the owner of a network may very well internalize such effects. When the owner of a network (or technology) is able to internalize such network effects, they are no longer externalities. This distinction, first discussed in Liebowitz and Margolis (1994) now seems to be adopted by some authors (e.g. Katz and Shapiro 1994) but has not been universally adopted.” http://oz.stern.nyu.edu/io/network.html “While formally different from and a more general concept than network externalities, much of the theory underlying network effects was developed to study network externalities, and the two terms are still used interchangeably.” 6 Rysman (2009), JRC Report
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Indirect network effects may be asymmetric The indirect network effects are not required to act with equal strength in both directions. Armstrong (2006), Evans (2003b), Evans & Schmalensee (2007) and Filistrucchi et al. (2013) consider that the existence of a one-way indirect network effects for at least one group of users is a sufficient condition for a platform or multi-sided market7.
This asymmetry may be reflected in the pricing structure, where one group of users pays significantly more than the other or bears the total cost of the participation of the other group. According to Rochet & Tirole “a market is two-sided if the platform can 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”8. Cross-subsidization of one group of users of the platforms by a different group is a common feature of platforms and may lead to the growth of the overall number of users of the platform with benefits for both sides. This explains why offering free services to some platform users might make perfect business sense and why “free” services for consumers are a prevalent business model in the modern platform economy9.
The asymmetry of indirect network effects is lower in the case of classical marketplaces (both sellers and buyers benefit) and higher, for example, in the case of advertising based platforms where both positive (supply of content) and negative indirect network effects (advertising) are present. Wilbur (2008) and Filistrucchi (2013) conclude that it is not necessary for the existence of a multi-sided market that two indirect network effects be present10.
- Platform operators facilitate interaction between users Another important element in the definition of the platform is the role of the platform operator. Technically speaking, the role of the platform operator or intermediary is to internalise the indirect network externalities that are generated by the fact that the decisions of each group of users affects the outcomes of the other group of users. In simpler terms, the platform operator facilitates the transaction, which would carry much higher transaction costs (for example search costs) or wouldn’t have happened at all. For example platforms operators may offer physical or virtual space to interact, they may also provide a code of conduct, instruments increasing trust, methods of payment or units of measurement to which both sides may agree.
This role of a facilitator of interactions has been emphasized already in the early literature on platforms Rochet & Tirole (2003) emphasize that the role of an intermediary is essential for the various sides’ ability to coordinate their interests.
7 Rochet & Tirole (2006) require two-way indirect network effects. 8 (Rochet & Tirole, 2006, p.664-665) 9 Users pay for these services in non-monetary ways, for example by giving the other side of the platform access to their data or attention. 10 According to Li (2015) it is crucial for advertising-supported media to qualify as MSM. Platforms monetizing content through advertising would not qualify as two-sided if two-way indirect effects are needed.
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Some authors proposed typologies of platforms based on the type of interactions they facilitate11. Evans (2003b) and by Evans & Schmalensee (2007) propose a classification of platforms that distinguishes between three types: market makers, audience makers, and demand coordinators. Market-makers bring together two distinct groups that are interested to trade. They increase the likelihood of a match and reduce search costs. Audience-makers match advertisers to audiences. Software platforms, operating systems, and payment systems are defined residually as demand- coordinators. They neither sell a transaction nor a ‘message’ but coordinate demand and thereby avoid duplication costs.
Filistrucchi et al (2013; 2014) distinguish between transaction and non-transaction platforms. Some sides in the latter type of a platform may participate without a transaction. Membership externalities in non-transaction markets arise from simply joining the platform (placing an ad in a newspaper, holding a payment card, having a point-of-sale terminal or attending an auction). Usage externalities arise from using the platform (for example, paying or accepting payment with a card, selling or buying a product at an auction).
- Platforms vs resellers: extent of control over sales conditions and direct interaction between sellers and buyers
Hagiu & Wright (2015a) propose an additional element that helps to distinguish multi-sided platforms ("MSPs") from other types of markets: direct interactions between sellers and buyers or between two or more distinct sides. Direct interactions between multiple sides set platforms apart from resellers (like grocery stores for example) and other types of fully vertically integrated firms ("V.I. firms")12. A platform offers a market place where suppliers and consumers can meet. A reseller buys the products from the supplier and acquires control rights (over pricing, promotion campaign, sales conditions, etc.).
11 Variable degrees of vertical integration and asymmetries between the parties on a platform make it more complex to apply the concepts of B2B, B2C and C2C in online platforms. B2B is often understood as a supply chain whereby seller and end user /buyer are formal companies and not individuals. In MSM some parts of the relationship can be B2B, others B2C and C2C. For example, in Google Search, the end users of search results are individuals and companies (both B2B and B2C). Advertisers on Search are companies that deal with a Google AdWords (B2B). Sellers on Amazon Marketplace can be individuals and companies; sellers on Amazon as a re-seller will be companies only. Sellers on AirBnB may be individuals or companies. Part of the commercial transaction (payments) runs through AirBnB (B2B) while content is delivered to end users (B2C). 12 Hagiu & Wright (2015b)
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Source: Hagiu & Wright (2015)
This limitation helps to exclude some important online service providers from the category of platforms. For example, Netflix would not classify as an online platform but merely as a retailer of films because there is no direct interaction between producers of content, who sell the rights to Netflix, and Netflix subscribers. Resellers purchase the inputs from suppliers and decide on the price and other parameters of the offer for consumers. They also assume most of the commercial risk. Consequently, taking Amazon or Pixmania as examples, only their Market Place businesses would classify as an online platform because buyers and sellers have some direct interaction and sellers can set the parameters of their offer. The Amazon resale book store would be a simple online retailer. The latter takes full control of the transaction while market places let buyers and sellers interact more freely. This is a view we subscribe to and the report doesn’t cover online services such as Netflix, iTunes, Spotify or Kindle.
It is important to note that many companies adopt a hybrid business model choosing to be active as a platform operator between different market participants in one area and as a reseller (or vertically integrated firm) in another. There is also a spectrum of business models that fall somewhere between these two categories depending on the extent of control over transaction parameters and the direct contact between users. It is important to note that the platform business model may not be the most advantageous in all situations. Hagiu and Wright (2015b) argue that the choice between these modes is determined by the relative information advantages of the seller and the intermediary13. The authors provide some empirical evidence in support of this view. For instance data collected from the Amazon website show that Amazon operates predominantly as in reseller mode in books because it has privileged information about the preferences of buyers, except for the long tail in book sales where demand is much harder to predict and the platform-marketplace mode is more prevalent. At the same
13 The label “intermediary” is used in a somewhat different way in the E-commerce directive where it refers to the liability and duty of care of online intermediaries that host, cach or transit digital content, mostly in connection with illegal content (violation of copyright and trademarks mainly). An online platform hosts information on digital or physical content. Here we are referring to liabilities to go beyond intellectual property rights and may include consumer protection legislation, product liability, etc.
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time Amazon works as in platform mode for electronic goods because the variety of products and variance in consumer preferences is much higher and more difficult to predict.
Conclusion
"Platform" is a broad label for several distinct types of multi-sided business models. The common element is that different types of users (sellers, buyers, advertisers, etc.) are brought together by a platform operator who facilitates the interaction by reducing transaction costs. The variable elements across the types of platforms include the types of users, the type of interaction, the relative importance of indirect network effects, the level of control over transaction parameters exercised by the platform operator and xxx. This variation in platform business models and characteristics has important implications for policy analysis regarding online platforms.
1.2 Drivers of the growth of online platforms (input from JRC report, G. Parker slides)
- Economics of online platforms business models
From the perspective of economic theory, "platforms enable two or more types of customers who could engage in a mutually valuable exchange to find each other through search and matching, to transact and to thereby create and exchange value." 14 Platforms can have two or more sides depending on the number of categories of customers that they serve. Facebook for example has more than two sides since it brings together individual users, advertisers, developers and businesses. Multi- sided platforms are not exclusive to the online world and exist in the offline world as well. Typical examples of offline multi-sided platforms are shopping malls.
Table 1: Examples of online and offline platforms Platform Side 1 Side 2 Side 3 Side 4
Facebook Individual users who Advertisers Application send and receive developers messages
Android OS Individual users Application Hardware developers manufacturers
WhatsApp Users who send and receive messages
Booking.com Accommodation Accommodation Advertisers of providers seekers related services (car rental, etc.)
14 David Evans, presentation on 27.10.2015
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Google Search Websites Searchers Advertisers
Google Maps Individual users / Application Advertisers Developers of searchers developers / website navigation operators products
PriceGrabber Online Vendors Shoppers
Amazon Sellers Buyers MarketPlace
Daily Mail Readers Advertisers newspaper
Shopping malls Stores Shoppers
Multi-sided firms sell access to customers. They recruit one set of customers and offer access to them to another set of customers. In that context, the customers are the "raw material" that the platform uses in its business model. As a result, for multi-sided firms the demand by one group for the platform's service depends on the demand by the other group. By facilitating interaction between different customer groups who could engage in a valuable exchange, multi-sided platforms reduce transaction costs and, thus, create value.
To illustrate this, we can take the following example:
PriceGrabber
PriceGrabber is a price comparison shopping platform. It caters to the needs of two customer groups: online vendors and shoppers. PriceGrabber gathers and organises information by various retailers about the products that they offer for sale. In that way, by accessing PriceGrabber shoppers are able to view and compare products and prices of different retailers much more quickly and easily than if they had to browse all individual retailers' websites one by one. The aggregation of sellers allows buyers to save on transaction costs in terms of time and efforts spent in search. The aggregation of buyers recruited by the platform allows sellers to reach those potential customers. This is particularly valuable for a seller in respect of a customer who is otherwise unaware of the existence of this particular seller but would be willing to make a purchase if he/she discovers the offer. The more buyers use the platform, the more attractive it is for sellers join and vice versa – the presence of more sellers on a platform would attract more buyers.
The creation of value by reduction of transaction costs and, thus, enabling more efficient value- exchanges is typical also for middlemen in the offline world whether they act as a platform (e.g. shopping mall) or not (e.g. grocery store).
A grocery store acts a middleman between producers of fruits and vegetables and consumers. It is not impossible for a consumer to get into direct contact with different vegetable producers and to negotiate a purchase probably at a lower price than the one offered by the grocer. That would,
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however, take a significant amount of time and effort. Instead, grocery stores act aggregate the products in outlets that are closer to consumers and in that way reduce the transaction costs for both sellers and buyers. “By making exchanges cheaper and more convenient, middlemen cause more efficient trades to happen. In doing so, they themselves create value.”15
1.2. Network effects
Multi-sided platforms are often characterised by the presence of direct and indirect network effects.
Direct network effects occur when the value of a service for a customer increases with the number of other customers who are using the service. In the offline world, the classic example is the telephone. The more users own a telephone, the more benefit a user can derive from owning a telephone. In the online world, this is the case for example with users of social networking platforms (e.g. Facebook) and online messaging services (e.g. Skype). For users of those platforms, the value of using the platform grows with the joining of other participants with whom they could connect/communicate. Therefore, platforms who have built a large customer base tend to attract the joining of more customers and grow even larger, a phenomenon also known as a “positive feedback loop”.
Indirect network effects arise when there are at least two distinct groups of customers and when the addition of a customer on one side of the platform increases the value of the platform for customers on another side of the platform. For example, the presence of more stores at a mall or of more traders at an online marketplace increases the value of the mall/online marketplace for shoppers. In that way, individual stores benefit indirectly by the addition other stores due to the increased foot traffic. This process also works vice versa: the presence of more shoppers increases the value of joining for sellers. Consequently, shoppers benefit indirectly by the interest of other shoppers in the marketplace since the increased number of potential customers attracts more sellers resulting in wider choice for each shopper. Similarly, the presence of a wide selection of hotels on Booking.com, for example, would attract more accommodation seekers to the platform. That would on its own turn increase the value of the platform for hotels and lead to even more hotels joining resulting in higher customer interest and so forth. In that way indirect network effects would feed into a self-reinforcing positive feedback loop.
It is that self-reinforcing tendency of network effects that is considered (along with other factors) liable to lead to market concentration.
The following diagram illustrates the variety of interactions which take place within a platform and the associated network effects:
15 Gwartney, J, Stroup, R. et al., Economics: Private and Public choice. Elsevier (15 edn, Cengage Learning, USA 2015) p.23
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Source: Annabelle Gawer, Presentation, 11.11.2015
1.3. Membership externality and usage externality
Network effects have been studied from the perspective of economics of externalities and are sometimes also referred to as network externalities. From an economics perspective, externalities are benefits or costs incurred by one party due the conduct of another party which are not reflected in the market price. Thus, externalities can be either positive (when they generate a benefit) or negative (when they generate a cost).
To illustrate this further: • An often cited example of a positive externality is the effect of immunisations. An immunisation prevents the individual from contracting a disease. It also creates the additional benefit (positive externality) of decreasing the risk for others in the community of contracting the disease. • A typical example of negative externality is air pollution resulting from burning fossil fuels which may give rise to public health problems.
In the context of platform economics, two types of indirect network externalities are particularly relevant: membership externalities and usage externalities. A membership externality16 is a type of positive externality when the value received by a member on side "1" increases with the number of members on side "2". Thus, the platform creates value to members of side "1" by aggregating members of side "2" and providing access to them. A usage externality exists when party "A" would benefit if they could get together with party "B" so that party "B"’s decision to join the platform benefits party "A". Party "B"'s presence on the platform creates a positive externality for Party "A". Party "A" and Party "B" could connect without a platform, but as explained in point 1.1, the platform reduces the
16 Katz, M. L./Shapiro, C., Network externalities, competition, and compatibility, The American economic review, 1985, pp. 424-440. From MonopolKommission report: "When one takes a closer look, a distinction needs to be made between two types of indirect network effects or externalities: Ex-ternalities in utilisation and externalities in membership. The present report takes an abstract view of this more detailed analysis. "
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cost of connecting. By coordinating the two sides, platforms solve a “positive externality” problem. As a result, platforms' value arises from facilitating value-creating exchange.
For platforms' value to arise it is sufficient that positive usage or membership externalities arise on one side of the platform. That could be the case with advertisers on social networking platforms for example. The platform creates value by helping customers on the one side get access to the customers on the other. Members on the second side (the target audience) could actually dislike being connected to members on the first side (advertisers). The platform can create value so long as there is the possibility of value-creating exchange.
1.4. Critical Mass of Customers
Due to the presence of network effects and the benefits of customer aggregation for saving transaction costs, platforms need a critical mass of customers on all sides to survive. “Critical mass refers to the minimal set of customers on each side that is large enough to attract more customers and result in sustainable positive feedback.”17
Startup platforms are faced with a “chicken and egg problem” since it is the presence of customers on side “1” that attracts the joining of customers on side “2” and the presence of customers on side “2” attracts customers on side “1”. Thus, each entrant platform, which usually starts with no customers on either side, would need to find out how to motivate joining on both sides. In that process, it is not only the number of customers that join that matters but also attracting customers on the two sides in the right proportions. If the platform attracts too many customers on side “1”, without there being sufficient customers on the other side, then the customers who have joined on side “1” might chose to leave as they would not value highly the use of the platform. Their exit would render attracting customers on side “2” even more difficult and could ultimately result in a negative feedback loop. If a platform cannot reach this critical mass both in terms of scale and balance between the different customer groups, the platform would not be able to survive in the long-run.
The following graph illustrates the role of critical customer mass in platform startup.
17 David Evans, presentation 27.10.2015
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Side 2
Ignition D*- Long-run equilibrium
C` Points of critical mass
Movements at starting to achieve C* critical mass C``
O Side B Side 1
Source of the graph: David Evans
The area between 0, C' and C'' represents the variety of numbers of customers from "Side 1" and "Side 2" which could lead to successful startup. All points between this area and the "Side 1" axis or the "Side 2" axis represent customer number ratios that are unsustainable and would lead to a negative feedback loop. C* is the optimal platform launch ratio.
1.4. A non-linear business model
Traditional business models are regarded as linear. In order to deliver a good to a customer, businesses go through R&D, manufacturing, distribution and sales. A business model can be vertically integrated to complete all of those functions or any of those functions could be sourced from other producers. In any case it can be generalised that value is created upstream and is flowing downstream to be delivered to the consumer.18
Development Manufacturing Distirbution Sales Consumer
Unlike traditional businesses, multi-sided businesses are not linear. Platforms provide a medium in which one set of platform customers delivers value to another set of platform customers:
18 Sangeet Paul Choudary , Why business models fail: pipes vs. platforms http://www.wired.com/insights/2013/10/why- business-models-fail-pipes-vs-platforms/
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Side D Side A
Platform
Side C Side B
As a result, interdependencies exist between platform customer groups, such as: • producers of complementary products (e.g. app developers) and end consumers (gamers) • advertisers and readers • accommodation providers and accommodation seekers
The demand of the different customer groups for the platform is related to the supply of other platform customer groups and vice versa.
1.5. Platform pricing
These interdependencies of demand along with network effects have implications for platform business models in particular in relation to pricing level and pricing structure. The price level charged by the platform is the sum of the amounts charged to platform customers on all sides of the platform. The question of pricing structure refers to the decision of the platform on how to allocate the prices across the sides of the platform.
The pricing structure is determined by the desire of the platform to attract all sets of customers and to attract them in proportions so as to insure its sustainable existence and growth. This frequently results in platforms setting prices asymmetrically across different sides. In practice, often the long-run profit maximizing price for a side can be less than marginal cost, including zero or less than zero. In such cases, asymmetries entail a side of platform (known as a subsidy side) paying less than marginal cost. The platform would then make a profit by the price charged on other sides of the platform (known as money side). This is a strikingly different pricing model when compared to the theory for traditional firms in which long-run price is always greater than marginal cost.
The decision on pricing structure by platforms aims at "solving the demand coordination problem arising from usage and membership externalities"19. Consequently, the decision on pricing structure would normally take account of characteristics and interdependencies of customer demand on both sides, such as:
19 David Evans, presentation 27.10.2015
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• the relative price elasticity of different customer groups: the customer group which is more sensitive to price would get a lower price or would not be charged at all (e.g. users on Facebook) • the relative need of one customer group for the other(s): the customer group which needs more to get in contact with the other side of market is likely to be charged (e.g. advertisers on Google) • how difficult it is to get the particular customer group to use the platform: the customer group that is relatively more difficult to attract is likely to be charged less, and • "whether the customer group could be considered a "bottleneck asset" by the platform".
1.6. The concepts of “Single-homing” and “Multi-homing”
Customers may use one or more platforms to interact with customers on the other side. Customers “single-home” when they use only one platform and therefore restrict themselves to interacting with the customers on the other side of that platform (e.g. most people use one operating system on a single device). Customers “multi-home” when they use two or more platforms and therefore can access customers on any of the platforms they use (e.g. most people have more than one payment cards). "When customers single-home, there can be intense competition for those customers because the platform that has those customers has a “monopoly” on accessing those customers. This intense competition can lead to low (less than marginal cost, zero or possibly less than zero) prices for the single-homing customers who then become the “subsidy” side of the platform and the platform would make a profit by charging the multi-homing side of the platform."20
2. The engineering design perspective on platforms … 3. Platforms as ecosystems …
Platforms as start-ups
Platforms as innovation drivers:
20 David Evans, presentation 27.10.2015
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[SOURCE of slide?]
- Ubiquitous connectivity (statistics on boroadband and smartphone usage in the EU)
Online platforms are one of the most successful business models of the digital era. The term "online platforms" is used to describe undertakings with very diverse business models. What they all have in common is the use they make of the power of pervasive Internet connectivity to provide a service of facilitating interactions between users.
Mobile devices - statistics
Broadband internet speeds - statistics
1.3 Benefits of online platforms
- For consumers
- For businesses
1.4 Europe’s position in the platform economy (based on Evans/Gawer report)
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- Usage of online platforms in Europe
- EU-based online platforms – global comparison
- Online platforms and jobs in the EU
Online platforms encompass a wide range of constantly evolving business types, sectors and markets with differing characteristics. Therefore, treating them as a separate class of businesses requiring horizontal, sectoral regulation may not be the best approach. Rather, regulatory analysis of online platforms should be focused on the identification of specific issues which may require targeted intervention. In this report a number of such issues have been identified based on the analysis of the 6 most popular types of online platforms21: social media, search engines, marketplaces, app stores, creative content providers and collaborative economy platforms.
The role of online platforms in economy and society is furthermore likely to continue to increase in the future. The number of global users of desktop computers and mobile phones is growing. 22 Worldwide mobile broadband subscriptions have even quadrupled in the past five years, to over 3.5 billion in 2015.23 With that, the time spent by users engaging with digital media is also increasing. A 2015 report on Internet Trends drawn up by KPCB, a venture capital company, fot example shows the increase in time spent interacting with digital media by Internet users in the United States24:
Platforms have succeeded commercially because they deliver a wide range of benefits to both businesses and consumers:
- facilitated economic growth by enabling sellers to access new markets and reach new customers at lower cost; - Increased the choice of goods and services for consumers and businesses; - Fostered innovation by bringing down barriers to entry; - Increased transparency of the market for customers; - Increased the trust of customers thanks to peer-to-peer review mechanisms; - Better matched supply and demand. Consumers: Businesseses:
21 Based on user statistics: 22 See, for example, the 2015 Mobile Economy Report by GSMA which shows that at the end of 2013 about half of the world's population had at least one mobile subscription. The number of subscribers has increased by almost 200 million in one year [unclear – please check]. It is expected that by 2020 about 3/5 of the global population will have a mobile subscription, see: < http://www.gsmamobileeconomy.com/GSMA_Global_Mobile_Economy_Report_2015.pdf> [accessed at XX]. 23 ITU annual global ICT data and ICT development index, available at: http://www.itu.int/net/pressoffice/press_releases/2015/57.aspx#.VmgDGf7luUn [accessed at December 2015]. 24 Kleiner, Perkins, Caufield and Byers, Internet Trends 2015, available at:
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The report also shows a trend of increasing engagement with the online world via mobile technologies as opposed to desktop technologies. Those finding are also supported by a study prepared by ComScore, an Internet analytics company:
Source: ComScore, The U.S. Mobile App Report, 21 August 2014, as cited by Perez, S., Majority Of Digital Media Consumption Now Takes Place In Mobile Apps
The ComScore study further shows that the raise of time spent online by users on mobile phones is largely driven by an increase in mobile apps usage:
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Source: ComScore, The U.S. Mobile App Report, 21 August 2014, as cited by Perez, S., Majority Of Digital Media Consumption Now Takes Place In Mobile Apps
Moreover, investment bank Digi-Capital predicts that global revenue from mobile Internet-based business would grow by more than 300 per cent by 2017 to hit USD 700 billion, mainly driven by mCommerce, consumer/enterprise apps and advertising. 25 Growth estimates across the various sectors can be derived from the below graph.
Seventy per cent of the most highly valued startup firms in 2015 (so-called "unicorn" companies with valuations of USD 1 billion or more) are online platform companies.26 The charts below illustrate the geographical distribution of startup platforms across three continents. From these graphs, it is evident
25 Digi-Capital, Mobile Internet Investment Review, available at
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that North America has the lead in terms of both the value and the number of online platform "unicorns":
GLOBAL UNICORN PLATFORM STARTUPS
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A recent global survey on online platforms shows that when looking beyond just startup firms, a similar picture emerges with US-based online platforms valued at a total of USD 3 123 billion against USD 181 billion for European online platforms.27
When looking at the situation in the United States, it also appears that companies operating the most important online platforms significantly contribute to innovation:
2. Analytical framework for policy questions on online platforms
2.1 Methodology (based on TNO, Ecorys, IViR study)
- Specific types of platforms have different roles / raise different regulatory challenges A platform offering brokering services to consumers in a particular sector may present different issues, and different risks, from those of a mobile app store or a search engine. When thinking about the regulatory framework the starting point have to be the characteristics of a specific type of a platform and the different problems that may be associated with them.
27 Evans, P. and Gawer, A., 'The Rise of the Platform Enterprise A Global Survey', 2016 The Emerging Platform Economy Series (No. 1), p. 10, available at: http://thecge.net/wp- content/uploads/2016/01/Platform-Survey-01_07_16_c.pdf [accessed at January 2016].
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- Platform characteristics as starting point for analysis
- Linking of key characteristics to policy issues
- Review of the legal framework applicable to each issue Many of the issues raised by online platforms are also present in the offline world and are already addressed by existing regulation.
- Basing policy recommendations on evidence of existing problems
2.2 Policy background
The growing importance of online platforms, and their possible future presence in all areas of social and economic life, warrants a close assessment of their benefits and risks, and of the optimal regulatory and business frameworks that allow the EU's citizens to maximally profit from those benefits – subject to the least possible risk.
Within the EU, online platforms are already greatly affecting citizens' lives, as they have moved them to communicate on different social networks, shop and compare offers online, efficiently share assets with strangers (houses, cars, meals), regularly trade second-hand products and tender out and perform ad-hoc tasks. In doing so, online platforms allow a wide-ranging disruption of traditional set-ups, both in the public and private sector. This includes the way in which businesses function, and the way the government has organised and regulated society in order to, for example, safeguard social welfare, security and human rights protection.
Notwithstanding that the EU's citizens are already profiting from efficiencies brought about by the large number of online platforms that exist around the globe, the share of the online platform business that is accounted for by European companies is significantly falling short of that accounted for by each of US and Asian companies. Indeed, by 2015, European platform enterprises accounted for only little over 4 per cent of the global platform business if measured by market value.28 If this trend continues, this could have a growing negative impact on the economic return brought to the European economy by the digital revolution. At the very least, this observation requires to be closely investigated, in order to determine whether any objective reasons lie behind it so that these can be effectively addressed.
At the same time, notwithstanding their fundamental impact on society, online platforms have been operating within a regulatory framework that remains relatively unchanged since the late 1990s. Indeed, although various existing bodies of legislation inherently also apply to online platforms, these are only currently being (gradually) adjusted to explicitly recognise their role and existence.
28 Evans, P. and Gawer, A., 'The Rise of the Platform Enterprise A Global Survey', 2016 The Emerging Platform Economy Series (No. 1), p. 10, available at: http://thecge.net/wp- content/uploads/2016/01/Platform-Survey-01_07_16_c.pdf [accessed at January 2016].
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- DSM priorities
- Europe’s position as a world leader in the digital economy
- Fair competition
- Consumer protection
- Personal data protection
- Other horizontal objectives
- Sectoral policy goals Rising economic and social importance:
• Large numbers of users in EU: provide statistics on usage • Many companies rely on platforms: provide statistics / data from the Eurobarometer - app developers, Amazon sellers, • Large size of platforms: market cap of the big platforms, etc • Disruptive effect and innovation: new business models, rapid evolution, big impact on society, challenge to incumbents
Introduction of the different issues described in section III:
• data, • transparency, • access, • B2B etc…
Regulators need to catch up with new technological developments and business models
• MS starting to take measures – need to avoid fragmentation. • Ongoing regulatory work at the EU level: NIS, GDPR, comp cases – existing definitions of platforms – need for a coherent approach
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2.2 Categories of online platforms covered in this report(based on P. Evans database)
- Online advertising platforms
- Search
- Marketplaces
- Social Networks
- Mobile ecosystems and app stores
- Payment systems
II. Main types of platforms: key characteristics and associated issues
1. Online advertising platforms
1.1 What are online advertising platforms? As part of its merger control practice, the Commission has previously looked into a market for the 'intermediation in online advertising', which involves so-called ad networks, ad exchanges and media agencies acting as aggregators of online advertising space for clients interested in running online advertisement campaigns. Ad networks were specifically described as "a two-sided platform serving (i) publishers (websites) that want to host advertisements, and (ii) advertisers that want to run ads on those sites".29 Both ad networks and ad exchanges can be considered to constitute online platforms. As with, for example, Internet search services and auction platforms, ad networks and ad exchanges rely on programmatic matching in order to reduce search costs. Given that many online platforms rely largely or even solely on advertisement income, these advertisement 'platforms of platforms' seem to play an important role in enabling innovation and competition to occur.
Ad networks bring together at least two groups of users in an online environment and allow those user groups to benefit from network effects. The operators of ad networks do exceed the status of 'mere intermediary', given that they aggregate online advertising space and resell this to advertising clients. Ad networks also provide additional services, for example by organising the payment for websites that publish advertising space and by providing advertisers with online tools to monitor the effectiveness of their campaigns. Finally, certain ad networks also provide so-called hosted ad serving tools to either publishers of online advertisement space or to advertisers, or both. These tools essentially allow the delivery of personalised ads to consumers within the correct advertisement space of a website, and to track consumer behaviour in order to improve the accuracy of this targeted advertising. By combining hosted ad-serving tools with the provision of intermediation services, ad networks are able to provide their different user groups with an integrated, seamless
29 Case COMP/M.4731 – Google / Doubleclick.
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advertisement service. It should however be noted that hosted ad-serving tools can, on a standalone basis, in some cases also be considered to constitute online platforms, as certain of these tools for example allow publishers of online advertisement space to themselves simultaneously target advertisers directly as well as via ad networks that can be accessed via the platform.30
Ad exchanges, in turn, constitute online market places that facilitate auction-based direct transactions between publishers of online advertising space and acquirers thereof (ad networks can be active both as buyers and sellers on these ad exchanges). They exist both in an open (i.e. accessible to all) and private form. The large ad exchanges seem to be closely integrated with their owners' ad networks (Google and Microsoft previously acquired, respectively, the Doubleclick and AdECN ad exchanges).
Finally, certain firms engage in the provision of general media buying services to advertisers, which services tend to cover different types of media including the Internet.31 Opposite to ad networks and ad exchanges, these firms cannot, as such, be considered to constitute online platforms.
1.2 Main players in the EEA Examples of large ad networks are Google's AdSense, Yahoo Advertising, Microsoft Advertising, TradeDoubler, Zanox, AdLink, AOL Advertising, and 24/7 OpenAdStream. These ad networks have generally existed since the early 2000s, although a number of them have changed ownership in the meantime (Zanox was for example acquired by Axel Springer, AdLink Media was acquired by Hi- media and AOL unsuccessfully attempted to acquire TradeDoubler). Besides these large players, there are also specialised ad networks, for example in relation to online video advertising.
Examples of ad exchanges are Microsoft Advertising Exchange, Google's Doubleclick, and OpenX. This sector too has seen a wave of acquisitions in recent times, with Google, Yahoo!, Microsoft and AOL respectively having acquired Doubleclick, Right Media, AdECN and Millenial Media. It is difficult to accurately estimate the current value of these ad exchanges, but it is noted that Google paid around EUR 2.3 billion for Doubleclick in 2007 (which was, however, only launching its ad exchange at the time), while AOL paid around USD 200 million for Millenial Media in October 2015.32
Finally, AppNexus and Facebook's Liverail are examples of hosted services that include both ad- serving tools as well as de facto ad exchanges where both advertisers and ad networks can be contracted directly by publishers as well as via real-time bidding ('RTB').
1.3 Market trends The firms active in online advertising generally seem to distinguish their services based on (i) types of ads (search ads, classified ads, text ads, display ads, etc.), and (ii) means of connecting to the end consumer (mobile versus PC). As consumers spend more time online via their mobile phones, the mobile online advertising segment is in particular experiencing very strong growth. AIB, the relevant
30 An example of such a platform for publishers is Facebook's Liverail (https://www.liverail.com/platform/). 31 See for a detailed description of these services the Commission's recent decision in case COMP/M.7023 – Publicis / Omnicom. 32 See AOL's corporate press release of 23 October 2015, available at: http://advertising.aol.com/blog/press-release-aol-completes-acquisition-millennial-media [accessed at December 2015].
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industry body, estimated the global online mobile advertising revenue at EUR 24 billion (USD 31.9 billion) in 2014, out of which EUR 4 billion would have been generated in Europe.33 In this mobile segment, display ads would be the most commonly used type of advertisements and in 2014, the European mobile display advertising segment would furthermore have grown by 70%.34
The online platforms that act as intermediaries in the online advertising sphere are both enabling and benefitting from the significant growth seen in online advertising. In the Netherlands, one of the most developed markets in terms of the use of online advertising, the display ads that were traded via automated ('programmatic') channels for example realised a growth of 38.9% in 2014, with the share accounted for by open auction increasing at the expense of fixed pricing (open auction currently amounting to around 80% of all transactions).35
1.4 Business model Ad networks generate revenue by arbitraging the cost of advertisement space against the price that advertisers are willing to pay for efficient access to aggregated types of advertisement space. Ad networks have previously been explained to generally offer a fixed amount per thousand clicks/views to publishers of advertisement space and to retain the incremental profit they generate on sales made to advertisers.36 Ad networks have been mentioned to thus retain 20% or more of advertiser revenues.37 In addition, publisher and advertiser ad-serving tools also tend to charge a commission to those publishers and advertisers that do not have in-house ad-serving capabilities and sales forces. For directly sold ads, these have been mentioned to usually amount to 5 cents per one thousand impressions served on the advertiser-side and to 7-8 cents per one thousand impressions served on the side of the publishers.38 For those ad networks that offer ad-serving capabilities as part of one integrated service, these charges can be part of an overall intermediation fee charged to their clients.
Ad exchanges similarly derive their revenue from intermediation fees (in the form of commissions on concluded transactions or, hypothetically, based on fixed subscription fees). One ad exchange explained that it indeed charges a 20% commission on advertising revenue, which would be lower than the commission generally charged by ad networks.39 The level of the intermediation fees charged by ad exchanges is likely closely related to the general cost of ad-serving tools and the 'commission' charged by ad networks, as publishers and advertisers tend to simultaneously use several channels, including ad exchanges, allowing them to induce competition. As with other
33 Report by IAB Europe, IAB Mobile and IHS 'Global Mobile Advertising Revenue 2014', available at: http://www.iab.com/wp- content/uploads/2015/08/Global_mobile_advertising_revenue_2014_report.pdf [accessed at December 2015]. 34 Ibid. 35 Report by IAB Nederland and Deloitte, 'Programmatic Trading The Netherlands 2014', of March 2015, available at: http://www.iabeurope.eu/files/1614/2868/1245/IAB_Netherlands_Programmatic_study_Final_lr_2014.p df [accessed at December 2015]. 36 Evans, David S., Ed., Platform Economics: Essays on Multi-Sided Businesses, Competition Policy International (2011), available at: http://ssrn.com/abstract=1974020 [accessed at December 2015]. 37 Ibid. 38 Ibid. 39 OpenX whitepaper, Ad Networks vs. Ad Exchanges: How They Stack Up, of July 2010, p. 10, available at: https://www.cs.princeton.edu/courses/archive/spring13/cos448/web/docs/adnets_vs_exchanges.pdf [accessed at December 2015].
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exchanges, ad exchanges do require a certain minimum level of liquidity in order to be able to sustain themselves and several have failed in this respect.40
1.5 Market structure The markets in which the various online advertisement platforms operate are characterised by a high degree of concentration as well as by significant vertical integration. Companies like Google, Yahoo! and Microsoft are namely active as large publishers of advertisement space (including, most importantly, search ads), as ad networks & ad exchanges and as suppliers of ad-serving tools.
The degree of concentration can be underlined by the fact that, in 2006, the share of the overall EEA- wide market for online intermediation in advertising accounted for by Google alone was estimated to amount to between 40% and 50%.41 At the same time, Doubleclick (which now forms part of Google) commanded market shares of around 40% of the market for the supply of ad-serving tools (both on the side of the publisher tools as well as on the side of the advertiser tools).
As regards the vertical integration observed in the market, the Commission previously recognised that this allowed a company like Google to foreclose competing ad-serving tools from access to its inventory of advertisement space (controlled via AdSense) which was served exclusively by Google's in-house ad-serving tool.42 At the same time, vertical integration between ad networks or ad-serving tools and other online platforms such as search engines or social media applications can enable significant synergies as the very rich user data held by the latter applications can allow advertisers to more accurately target their advertisements. Vertical integration can indeed allow for efficiencies (in the form of single points of access and reduced costs) and result in a limitation of competition (given that, for example, large ad networks may not have an incentive to engage in direct competition with ad exchanges on the level of commissions charged).
The high levels of concentration in markets that are adjacent to those in which ad networks and ad exchanges operate, and the ability of vertically-integrated firms to leverage their power in these related markets (in the form of control over premium advertisement space and user-generated data) into the advertisement sphere likely lead to significant barriers for new entrants.
1.6 Impact of online advertisement platforms Generally speaking, online advertising platforms allow the 'programmatic' (or automated) targeting of advertisements using user data as its key input and subject to effectiveness monitoring by advertisers and publishers (the monitoring being enabled by online ad-serving tools). This automated form of advertising is considered to significantly improve the effectiveness43, and limit the
40 Evans, David S., 'The Online Advertising Industry: Economics, Evolution and Privacy', 23 Journal of Economic Perspectives 3 (2009), p. 52. 41 Cf. case COMP/M.4731 – Google / Doubleclick, recital 105. 42 Cf. case COMP/M.4731 – Google / Doubleclick, recital 94. 43 Hagiu, A., Multi-Sided Platforms: From Microfoundations to Design and Expansion Strategies, of 15 November 2006, p. 10, available at: http://www.hbs.edu/faculty/Publication%20Files/07-094.pdf [accessed at December 2015].
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intrusiveness44, of advertisement campaigns and the vast majority of industry players consider that it will constitute a very important part of digital advertising in the future.45
Moreover, ad networks appear to play a key role in allowing websites and mobile applications with relatively small customer audiences (e.g. startup companies that are still building up their audience or websites that target a very specific audience) to generate advertising revenue, given that ad networks can both supply the required ad-serving tools and aggregate ad space on individual websites so as to allow advertisers to reach a certain required size of Internet audience (an audience that tends to divide its attention between different online platforms/media outlets).46
1.7 Key characteristics relevant for policy
- collection and use of personal data
- auction-based sales of ads, pricing
- importance of access to advertising networks for publishers and suppliers of goods / services
1.8 Key issues
- privacy,
- transparency regarding use of personal data,
- high cost to sellers
Literature In relation to the market for the provision of online advertisement intermediation services, one particularly relevant critique is that the strength of, for example, ad networks is determined not only by the size and importance of their existing networks of publishers and advertisers, but also by the knowledge the ad network in question has of its customers' preferences. As many ad networks are vertically integrated with other types of platforms (such as, for example, online search engines), this knowledge is partly (or even largely) derived from activities performed in neighbouring markets. At the same time, the user data generated by the provision of online advertisement intermediation services can increase the strength of these firms' activities in those same, neighbouring markets (it could improve search services as well as the targeting of ads for the firm's own websites). Accordingly, it may be inappropriate for regulatory authorities to look at the advertisement intermediation market in isolation from firms' activities in neighbouring markets, and vice versa.47
44 Evans, David S., 'The Online Advertising Industry: Economics, Evolution and Privacy', 23 Journal of Economic Perspectives 3 (2009), p. 56. 45 Report by AppNexus, IAB Europe and WARC, 'Why and how ‘programmatic’ is emerging as key to real- time marketing success', of June 2014, available at: http://www.iabeurope.eu/files/7214/0197/2316/The_Why_and_How_of_programmatic_- _European_report_-_FINAL.pdf [accessed at December 2015]. 46 Evans, David S., 'The Online Advertising Industry: Economics, Evolution and Privacy', 23 Journal of Economic Perspectives 3 (2009). 47 See in this respect, for example, the Study for the ECON Committee of the European Parliament of July 2015 and entitled 'Challenges for Competition Policy in a Digitalised Economy', p. 54, available at: http://www.europarl.europa.eu/RegData/etudes/STUD/2015/542235/IPOL_STU(2015)542235_EN.pdf [accessed at December 2015].
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This may, in turn, mean that the existing competition law toolkit is not entirely fit-for-purpose in relation to online platforms in general, and online advertisement intermediation services in particular.
Also, as with other online platforms, the question has been raised of whether the collection and processing of private user-generated data represents a cost to consumers, and whether this would for example require greater transparency or rules on private data ownership in order to mitigate it.48 Given the significant vertical integration that characterises firms active in these markets, the scope and accuracy of private user-generated data that they control is ever increasing and, with it, the privacy concerns of citizens and regulators.
Another question that is inherent in advertising is the difficulty to measure its effectiveness.49 On the one hand, Internet users that view a certain display ad for a certain minimum duration (that results in the advertiser paying the ad publisher) may nevertheless consider the ad a nuisance and attribute this negative experience to the advertising firm in question. On the other hand, such a display ad may result in, for example, (increased) brand loyalty without this being measurable in terms of short-term sales increases. Given this inherent difficulty, it is likely similarly hard to establish the precise added- value of targeted, programmatic advertising that is enabled by ad networks and ad exchanges. It may well be that, therefore, advertisers continue to pay an imperfect price for advertising.
The enabling or assisting of deceptive ads by online advertising platforms has furthermore been subject to criticism50, as this practice could unnecessarily raise costs for advertisers and involve significant consumer harm.
Public consultation
2. Marketplaces and e-commerce
2.1 What are online marketplaces? The simplest way to answer this question is to identify those websites and applications that function roughly in the same way as village marketplaces used to. Namely to provide, in return for some form of commission, a central space to third-party sellers of goods and of services – with the marketplace offering, in principle, the ability to attract buyers. The single most important example of an online platform that would be encompassed by this definition is eBay, which allows independent sellers to efficiently find demand for their goods. The essential added value of marketplaces lies in their ability to reduce search costs by efficiently having supply and demand meet and the difference between offline and online marketplaces is primarily one of scale. However, online marketplaces can offer
48 See, for example, Evans, David S., 'The Online Advertising Industry: Economics, Evolution and Privacy', 23 Journal of Economic Perspectives 3 (2009). 49 See in this regard, for example, Lewis, R and Rao J 'The Unfavorable Economics of Measuring the Returns to Adverising', Quarterly Journal of Economics (2015). 50 See, for example, http://www.benedelman.org/rightmedia-deception/, and http://www.benedelman.org/ppc-scams/ [accessed at January 2016].
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additional functionalities such as built-in auction mechanisms and they can play a role in the optimisation of sales (e.g. by providing user data that allows targeted advertising).
The abovementioned scale and efficiency offered by online platforms has moved both private and professional sellers to the online sphere and results in a situation where pure online marketplaces can be difficult to distinguish from pure online resellers.51 Certain 'hybrid' online marketplaces also exist where both the vertically-integrated platform operator as well as third-party sellers are active in the sale of goods (Amazon and Bol.com are examples of such hybrid online marketplaces). Finally, besides enabling transactions between consumers (C2C) and between consumers and businesses (B2C), online marketplaces for the supply of goods and services between professionals have also developed (B2B).52 Examples of the latter type of online marketplace are online financial trading platforms, energy exchanges (e.g. virtual natural gas trading hubs), online platforms that connect business ideas with investors (e.g. Kickstarter.com), those that connect consulting professionals with companies as well as online waste management platforms. This section will however focus on those online marketplaces that involve the provision of goods and services to consumers.
2.2 Main players in the EEA Within the EEA, major examples of (hybrid) online marketplaces are eBay, Amazon, Booking.com, Spartoo and regional players such as Marktplaats (for Belgium and the Netherlands) and Allegro (for Central and Eastern European EU Member States). Other examples of significant marketplaces with activities in multiple EU Member States include Zalando (hybrid reseller/marketplace for fashion with EUR 2.2 billion in sales in 201453), Groupon (global marketplace for promotions), Chrono24 (global marketplace for luxury watches), Just Eat, Delivery Hero (both resellers/marketplaces for takeaway food) and MiniInTheBox.com (global hybrid reseller/marketplace mainly for electronic appliances).
The (growing) importance of these online marketplaces is underlined by their significant turnovers, growth rates and investor appetite in their business. Indeed, the successful regional Benelux marketplace Markplaats.nl was acquired by eBay already back in 2004 for EUR 225 million.54 Bol.com, another regional Benelux player, was moreover reported to achieve an annual turnover of around EUR 350 million in 2012, when it was acquired by the retail firm Ahold.55 EBay, in turn, reported significant global net revenues of around USD 7 billion for its marketplaces business in 2014 (up from around 5.8 billion in 2012), which constitutes only a fraction of the volume of trades that occurred via its various online platforms.56 Even a specialty online marketplace like Chrono24.com reported EUR 500 million of luxury watches having been sold via its website in 2014.57 Finally, Catawiki, an
51 See in this regard, for example, Hagiu, A., & Wright, J., 'Marketplace or Reseller?', (2015) Management Science, 61(1), 184-203. 52 See in this regard also the 2015 special report of the German Monopolies Commission 'Competition policy: The challenge of digital markets', available at: http://www.monopolkommission.de/images/PDF/SG/s68_fulltext_eng.pdf [accessed at December 2015]. 53 As stated on its website: https://corporate.zalando.com/en/facts-and-figures-0#fc-220 [accessed at December 2015]. 54 See eBay's corporate press release of November 2004, available at: http://pages.ebay.com/aboutebay/thecompany/2004/november.html [accessed at December 2015]. 55 See case COMP/M.6543 Ahold / Flevo of May 2012. 56 See eBay Inc. 2014 Form 10-K, available at: http://www.sec.gov/Archives/edgar/data/1065088/000106508815000054/ebay201410- k.htm#s7F47B4FA7818A72308712F1C796079E8 [accessed at December 2015]. 57 See Chrono24's website, at: https://about.chrono24.com/company/ [accessed at December 2015].
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online auction marketplace for collectables that was founded only in 2008 was reported to have been the fastest growing technology firm in the EMEA-region in 2015.58
Online marketplaces compete for buyers with other platforms, both online and offline. Although growing in number and size, the vast majority of goods appears to still be sold 'offline' (via retail outlets), which in principle means that significant scope for further growth remains. In a 2014 company presentation, Zalando indeed estimated the online fashion market to account for less than 10 per cent of total fashion sales.59
2.3 Business models The core function of online (e-commerce) marketplaces is to allow goods to be sold to consumers in an effective manner, by lowering search costs both for sellers and buyers. The lowering of search costs is generated both by scale economies (i.e. more products and prices can be compared by consumers and a wider audience can be addressed by sellers through a single point of access) as well as by increased trust; indeed, as online market places generally 'vet' third-party sellers in some way or another (e.g. by awarding certificates, displaying customer reviews or requiring authentication measures), and given that they intermediate in the payment process (e.g. by prohibiting certain payment methods that are susceptible to fraud), sales inefficiencies are limited.
Besides limiting search costs, online marketplaces can offer a variety of additional services to both sets of users. Online market places can, for example, offer authentication and valuation services to third-party sellers (cf. the services of Chrono24.com and of Catawiki), they can support secure payment methods from which both buyers and sellers benefit and they can allow buyers to report fraud directly and efficiently to the police.
Online marketplaces can generate revenue in a variety of ways, including through marginal reseller activities, through commissions charged on third-party sales and through the sale of online advertising space. The abovementioned online auction marketplace Catawiki for example charges a 12.5% commission on each winning bid.60 EBay, in turn, charges a 10% commission on the total cost for the buyer (including shipping cost) of each item sold as well as a monthly charge for listing items (so-called 'insertion fee').61 In addition, eBay offers advertisement space on its website to third- parties including ad networks.
Also, certain online resellers generate additional revenue by allowing third-party sellers onto their platforms, possibly in return for a 'subscription' fee (cf., for example, Pixmania's marketplace PixPlace62) and generally subject to commissions being charged on sales. Indeed, several online resellers have recently opened their platforms to third-party resellers, thereby effectively creating 'full' online market places (examples of such firms are Zalando, Bol.com, Pixmania and Amazon). On Amazon's Marketplace, third-party sellers are even charged a number of different commissions on
58 According to Deloitte's 2015 Technology Fast 500™ ranking, available at: http://www2.deloitte.com/content/dam/Deloitte/global/Documents/Technology-Media- Telecommunications/gx-deloitte-tmt-emea-fast500-2015-rankings.pdf [accessed at December 2015]. 59 Zalando corporate presentation 'Europe's Leading Online Fashion Destination' of October 2014, available at: https://corporate.zalando.com/sites/default/files/mediapool/2014-10- 13_company_pres_vf_0.pdf [accessed at December 2015]. 60 As stated on its website: http://www.catawiki.com/help/selling [accessed at December 2015]. 61 As stated on its website: http://pages.ebay.com/help/sell/fees.html [accessed at December 2015]. 62 http://pixplace.pixmania.com/fr/index.php?itag=29280 [accessed at December 2015].
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completed sales, including a 'referral fee' that can range from 8% to 45% of the price of the item sold, a variable 'closing fee' and a fixed 'per-item' fee (which is not due for those firms paying a regular subscription fee).63
2.4 Market structure As already mentioned, the online marketplaces continue to, principally, compete for customers with brick-and-mortar retail outlets. This is regardless of whether the online platform operates as a reseller of goods or as a mere intermediary marketplace. Importantly though, virtually all 'offline' shop owners that manufacture and sell their own goods can simultaneously benefit from the presence of online marketplaces, if the latter allow themselves to be used as an additional sales channel. It would appear, therefore, that it is the pure resellers of goods that operate using physical shops that could be affected most significantly by the increasing importance of online marketplaces. One could think in this regard of the pressure that was placed on the business model of physical video rental shops with the introduction of online video streaming platforms.
Given the degree of competitive constraints exercised between the online and the offline world, one could argue that the relevant product markets in which online marketplaces operate encompass all sales of a given product, or range of products, regardless of the medium used. The Commission has previously taken this approach as part of its merger control practice, although it left the possibility of defining a separate relevant market for online sales open.64 However, the latter approach was taken in respect of an online reseller, rather than a pure intermediary marketplace. This is an important distinction, as online marketplaces principally compete against other online marketplaces, both for attracting businesses and customers. Limiting the market definition to online intermediaries would however leave out hybrid online marketplaces that also act as resellers of goods. In this regard, Germany's Monopolies Commission recently concluded that up to now, no generally valid conclusion could be drawn in terms of market definition that would allow to appropriately assess the possible market power held by online marketplaces.65 It nonetheless concluded that, based on commission turnover shares, the market for online intermediation appeared highly concentrated.66
As far as online intermediation services are concerned, high concentration levels may indeed be likely and will not necessarily be negative, as the existence of multiple platforms may rather reduce the impact of network effects generated by each of them.67 This inherent feature of platform or multi-sided markets could however mean that barriers to enter the markets for the sale of certain specific goods are increased in case the operator of the dominant marketplace also acts as a reseller of goods.
63 As stated on its website under 'Fees and Pricing', see: https://www.amazon.com/gp/help/customer/display.html?nodeId=1161240 [accessed at December 2015]. 64 Cf. case COMP/M.6543 Ahold / Flevo of May 2012. 65 Cf. the 2015 special report of the German Monopolies Commission 'Competition policy: The challenge of digital markets', p. 87, available at: http://www.monopolkommission.de/images/PDF/SG/s68_fulltext_eng.pdf [accessed at December 2015]. 66 Ibid. 67 Cf. in this regard for example Caillaud, B., & Jullien, B., 'Chicken & egg: Competition among intermediation service providers' 34 RAND Journal of Economics (2003), pp. 309-328.
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By way of example and for mere orientation purposes, it is interesting to note that in the Netherlands, where Marktplaats and Bol.com are the dominant online marketplaces68, eBay proceeded to acquiring its largest competitor. The existing market structure in the Netherlands could therefore show some support for the notion that these are particularly prone to 'tipping' in favour of one or several dominant firms, due to the importance of network effects for businesses and consumers.
2.5 Impact of online marketplaces A recent study estimated the total European (including the Russian Federation) e-commerce sector to generate EUR 477 billion in turnover in 2015,69 Dutch marketplace Marktplaats.nl alone contains over 9 million ads70 and recent entrant Catawiki already organises 100 auctions per week, attracting 12 million international visitors per month. Given the existing scale of e-commerce in Europe and its potential for further growth71, online marketplaces are bound to (increasingly) impact consumers and businesses alike.
Consumers gain major advantages in the process; the ability to effectively shop cross-border online will allow for a wider choice and lower prices. Consumers will indeed be more likely to find a product that more closely matches their desired criteria, as online marketplaces allow them to overcome fundamental barriers to exploiting the full potential of the EU's internal market (including search costs, distrust and language barriers).72
Businesses, in turn, benefit from online C2C marketplaces that offer a wider target audience, while online B2B marketplaces allow them to optimise their production processes (e.g. raw materials e- procurement allows to achieve quality and price efficiencies).
Online marketplaces (C2C, B2C and B2B) therefore have a crucial role to play in enabling growth and innovation, as the potential for efficiency gains combined with increased price competition will favour innovative firms and increase research and development spending. Moreover, certain of these players can exist exclusively online and their existence therefore adds another dimension to the economy.
68 According to Similarweb data, Marktplaats and Bol.com are, respectively, the sixth and seventeenth most visited websites in the Netherlands whereas eBay does not feature in the top fifty of most visited websites. See: http://www.similarweb.com/country/netherlands [accessed at December 2015]. 69 According to Ecommerce Europe's 2015 report 'the European B2C E-commerce report 2015', available at: http://www.emarketer.com/Article/European-Ecommerce-Turnover-Hit-477-Billion-This- Year/1012975 [accessed at December 2015]. 70 According to its website: http://www.marktplaats.nl/i/help/over-marktplaats/ [accessed at December 2015]. 71 The Commission previously noted that only 15% of consumers were reported to have bought online from other EU Member States in 2014, while 44% did so domestically, leaving the EU's Digital Single Market underexploited, see: Commission Staff Working Document 'A Digital Single Market Strategy for Europe – Analysis and Evidence' SWD(2015) 100 final, available at: http://eur-lex.europa.eu/legal- content/EN/TXT/?uri=CELEX:52015SC0100 [accessed at December 2015]. 72 See in this respect also the Commission Staff Working Document 'A Digital Single Market Strategy for Europe – Analysis and Evidence' SWD(2015) 100 final, section 2.2., available at: http://eur- lex.europa.eu/legal-content/EN/TXT/?uri=CELEX:52015SC0100 [accessed at December 2015].
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2.6 Key characteristics relevant for policy
- collection and use of data,
- sales of third-party goods / services,
- distribution of risk,
- vertical integration of some players,
- differential pricing (based on profiling)
2.7 Key issues
- privacy
- transparency of terms and conditions
- transparency of data collection and use
- responsibility / liability
- risk of discrimination
- risk of discrimination of customers based on data (lack of transparency)
Literature
In relation to online marketplaces, a number of potential competition law-related concerns have previously been raised.
As a number of online marketplaces operate a 'hybrid' reseller/intermediary business model, while allowing the goods sold on its platform to be 'advertised' (i.e. to be pushed higher in search rankings), one such possible concern is that operators of online marketplaces discriminate in search rankings in favour of their own products. In general, these are concerns resulting from vertical integration between seller and platform and they can take different forms.73 Online marketplaces can also engage in the bundling of services, which may however also generate positive effects in terms of consumer welfare.74 Moreover, one could imagine powerful online marketplaces trying to impose certain restrictions on sellers, for example in the form of exclusivity or price parity clauses.
Besides possible competition concerns, an important question revolves around the issue of liability of online marketplaces for faulty or counterfeit goods. In relation to a copyright infringement having occurred on the eBay marketplace, the Court of Justice of the European Union in this regard previously ruled that online intermediaries that play an active role in optimising the presentation, or
73 See also the 2015 special report of the German Monopolies Commission 'Competition policy: The challenge of digital markets', p. 91, available at: http://www.monopolkommission.de/images/PDF/SG/s68_fulltext_eng.pdf [accessed at December 2015]. 74 As explained in the 2015 special report of the German Monopolies Commission 'Competition policy: The challenge of digital markets', p. 91, available at: http://www.monopolkommission.de/images/PDF/SG/s68_fulltext_eng.pdf [accessed at December 2015].
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in the promotion, of the good in question cannot benefit from the liability exemption laid down in Article 14 of Directive 31/2000/EC (the 'E-commerce Directive').75 It however remains unclear to what extent online marketplaces can be liable vis-à-vis consumers for faulty or counterfeit goods, and whether a similar standard of 'active versus passive intermediaries' as the one defined in relation to the protection of intellectual property rights applies. In order to ensure a high level of consumer rights protection, while ensuring that online marketplaces can continue to deliver their important added value to sellers and consumers in the EU, clarity on this issue is likely required.76 This may be all the more important given that differences in national (consumer protection) rules are among the most frequently quoted obstacles to developing cross-border e-commerce in the EU.77
Related to the topic of liability is the question of transparency of online marketplaces on their pricing policies, use of personal data, promotion of paid search results, the potential for recourse for consumers, etc. In the absence of certain minimum transparency requirements, consumers may not be able to determine what the precise cost of the intermediation service is and whether its trust is justified. In order for marketplaces to be able to justifiably allay liability vis-à-vis its users, specific transparency requirements may therefore be necessary.
Public consultation
An important potential concern that was already recognised by the Commission when it announced its Digital Single Market Strategy in May 201578, is the imposition of contractual restrictions by manufacturers on their retailers that limit the latter's freedom to sell their goods on online marketplaces.79 [EBAY COMPLAINT] This would hamper retailers' ability to offer their goods online and limit competition.
75 See case C-324/09 L'Oreal et al v Ebay et al (2011). 76 The need to curb legal uncertainty in relation to the role of online platforms was also raised by the French Digital Council in its report on platform neutrality of May 2014, available at: http://www.cnnumerique.fr/wp-content/uploads/2014/06/PlatformNeutrality_VA.pdf [accessed at December 2015]. 77 Cf. Commission Staff Working Document 'A Digital Single Market Strategy for Europe – Analysis and Evidence' SWD(2015) 100 final, available at: http://eur-lex.europa.eu/legal- content/EN/TXT/?uri=CELEX:52015SC0100 [accessed at December 2015]. 78 In the Commission Staff Working Document 'A Digital Single Market Strategy for Europe – Analysis and Evidence' SWD(2015) 100 final, available at: http://eur-lex.europa.eu/legal- content/EN/TXT/?uri=CELEX:52015SC0100 [accessed at December 2015]. 79 Cf. European Commission Communication of 6 May 2015, A Digital Single Market Strategy for Europe, COM(2015) 192 final.
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3. Internet Search Services
Country Google Bing Yahoo
Austria 95.5% 2.2% 1.2%
Belgium 95.1% 2.8% 1.1%
Bulgaria 97.0% 1.2% 0.5%
Croatia 97.0% 1.1% 0.8%
Cyprus 93.2% 2.7% 2.0%
Czech Republic 76.0% 1.3% 0.6%
Denmark 95.5% 2.3% 1.4%
Estonia 95.0% 1.7% 0.8%
Finland 96.5% 2.1% 0.8%
France 93.5% 3.1% 2.8%
Germany 93.4% 2.4% 1.9%
Greece 96.2% 1.4% 1.1%
Hungary 97.2% 1.3% 0.6%
Ireland 93.4% 3% 2.6%
Italy 95.1% 1.9% 1.9%
Latvia 95.1% 1.7% 0.9%
Lithuania 95.7% 1.7% 0.8%
Luxembourg 94% 2.9% 2.1%
Malta 91.2% 3.8% 3.2%
The Netherlands 94.1% 2.6% 1.3%
Poland 97.5% 1.1% 0.7%
Portugal 96.4% 1.9% 0.7%
Romania 95.8% 1.2% 1.8%
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Slovakia 96.8% 1.6% 0.7%
Slovenia 96.8% 1.2% 0.7%
Spain 95.2% 1.8% 2.2%
Sweden 94.7% 3.1% 1.5%
UK 90.2% 5.0% 3.7%
3.1 Main market players
Table 1: Distribution of search queries on Google, Bing and Yahoo within EU Member States
Table 2: Distribution of search queries on leading online search providers in selected non-EU countries
Country Google Bing Yahoo Yandex Baidu
USA 80.2% 9.9% 8.3% - -
Russia 53.2% 1.3% 1.0% 38.4% 0.04%
China 6.3% 2.0% 1.1% - 62.0%
Turkey 95.8% 1.1% 0.4% 2.5% -
Japan 61.2% 2.5% 35.8% - 0.2%
Source for tables: The tables above are based on figures estimated by StatCounter Global Stats
3.2 What are internet search services Online search services started developing with the birth of the Internet in the early 1990ies. The uncategorized large amount of information available on the World Wide Web became only accessible to internet users by means of search services. This function of search services to locate content on the internet essentially remained unchanged during the evolution of the internet towards a ubiquitous communication and business medium containing a virtually limitless amount of information.80
80 With regard to the function of search services see for instance German Monopolkommission, Special Report 68, page 50 f. with further reference.
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Search services were not immediately associated with a particular business model. Their only function in the early 1990ies was to ease access to information. They were developed out of an academic environment without immediate financial interest and typically offered free of charge. In the absence of a business element and the mostly niche and academic environment in which they were initially used, search services were largely operating without direct profit orientation, did not require ethical or legal standards and largely operated outside the enforcement of the existing and applicable rules on telecommunication networks and market places.
Typically all search engines since the early days of the internet operate in three steps:81
• "Crawling" is the process by which a search service automatically accesses a large amount of websites on the internet and collects the information contained on each website; • "Indexing" is the process by which a search service archives the information found on the websites in a logically and analytically organized index; • "Serving" is the process by which the search service provides a user with a result from its index which best corresponds to the user's search query.
All three steps involve a judgement by the search service which:
• Excludes certain websites from the crawling; • Excludes certain information from the search service's index; • Directs the user primarily to a certain result in the index (for instance by listing such results first) and not to other relevant results in the index during the serving process.
Typically, these judgements are made by so called "algorithms". An algorithm is a step by step operation to be performed.82 Typically algorithms used by search services are a computer code which is specifically designed to perform the selection of search results within the three steps of Crawling, Indexing and Serving.83
Internet search algorithms became much more complex within the more than two decades since they are used to reflect the needs of a majority of users in a variety of areas and also the requirements of the business model run by any specific search service. Moreover, certain search services have also implemented self-imposed and self-created ethical rules which may in certain cases also be reflected in the algorithms. An additional level of complexity arises from the increasing amount of information on the internet which needs to pass efficiently through the processing by the various algorithms.
Essentially, algorithms are compiled by establishing a set of selection rules which are then implemented in computer code and within the computer infrastructure of any specific search service. Prima facie there are no limitations as to the changing of selection rules to be implemented by a search service. However, rules may have to take into account the existing
81 See for instance Google's explanation on "How Google Search Works" available at: https://support.google.com/webmasters/answer/70897?hl=en#1 82 Include reference from Newton's telecom dictionary. 83 Include reference from Newton's telecom dictionary.
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infrastructure of a search service which has been established by design choices that any specific search service has made in the past when establishing its infrastructure and software (like for example the existing index that has been generated over a period of time or the server infrastructure needed to respond to search queries at a certain speed).
3.3 What are the business models of search services
The growing amount of data and of number of users made investment in expensive infrastructure84 and more complex algorithms necessary over the last two decades. This lead to a large amount of risk capital being invested in search engines particularly starting with the year 2000 and mostly in the US.85 The need to return on the invested capital put increasing pressure on search services to implement a viable business model. There are mainly two categories of business models that have been developed within the area of search services which could be decided in a multitude of sub categories depending on the sector in which any search service is active.
The first business model which generated profits was the so called "pay for placement model" which was first introduced Goto in 1998. "Goto, which was later acquired by Yahoo, was a search engine where the results were all advertising. Sites bid for the top spot in any given search term, with the top bidder being listed first in the search results. But advertisers paid only if a user clicked on their ad."86 The concept of auctions for the first listings of any particular search terms became a standard element of general search business model, albeit it was used in different variations. For instance Google's company AdWords only offers the "Goto model" for what Google calls "Adwords paid search". However, in order to attract more users to its site, Google also offers what it calls "Organic Search" which is allegedly based on selection rules independent from third party payments (e.g. traffic volume on the searched website, linking in other sites, design of the searched website, etc.) which are implemented in Google's algorithm called "PageRank".87
Another business model which started being implemented since around the year 2000 is that of "data monetization". Search services collect large amounts of data for instance about the main interests of consumers, their geolocation and their financial capability. The data collected is then further processed by aggregations, anonymization and similar techniques and made available upstream against payment to suppliers wishing to improve their marketing strategies and product offering.
84 Find quote on number of servers and response times for general search services. 85 Include reference to risk capital investment in presentation of Anabel Gawer. 86 The New York Times, Google and Yahoo Settle Dispute Over Search Patent, 10 August 2004, available at: http://www.nytimes.com/2004/08/10/business/technology-google-and-yahoo-settle-dispute-over- search-patent.html . BETTER REFER TO SETTLEMENT IF PUBLIC OR PATENT COURT DOCUMETS. 87 Google Search Engine Optimization Starter Guide, available at: http://static.googleusercontent.com/media/www.google.de/de/de/webmasters/docs/search-engine- optimization-starter-guide.pdf .
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Most search services available on the internet today use a combination of these two business models. Both business models are based on what is described in economic literature to be a multisided market, namely a market where the turnover obtained by the search service from one class of users (i.e. the companies paying for advertising and data) depends on the number of the other class of users (i.e. the users served with the search results and providing the data).88 This phenomenon is described with the term: "network effects" As a result the economic success of a search service depends on a number of factors like for instance:
• The attractiveness of the offered search services; • Successful branding; • The adaptation of the content of websites to the specifics of a particular search engine ("indirect network effects").
3.4 Sectors or market segments of search services Historically search services have first covered the entirety of the internet. Such services can be described as "general search services" With the growth of the information available and the increasing usage of as a business environment more specialized search services limited to a certain type or structure of information or to certain customer groups have started to develop. Such search services can be described as "specialized search services".
Concerns with regard to search services emerging from the consultation The Commisison's stakeholder consultation has shown concerns mainly with regard to the following aspect of search services:
• Gatekeeper role • Misinformation • Non respect of fundamental rights and guarantees o Data Privacy o Property of copyright owners o Protection of minorities • Implementation of anti-discrimination legislation o Lack of legal certainty with regard to contract law terms impacts on property rights and fundamental constitutional principles • Lack of enforcement of legislative framework • Lack of transparency
Are the gaps addressed by the application of the existing rules and legislation So far there is very little or no regulation specifically targeted at search services but there have been a number of attempts in the EU to apply existing legislation or case law by analogy to the activities of search services. The most prominent such example is the ongoing Google investigation where the EU's competition rules are being applied to the new phenomenon of search engines. Furthermore, in certain Member States legislation has been enacted to protect
88
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consumers against misinformation by certain specialized search services (in particular price comparison services).89
Furthermore, extensive analyses of platforms including search services have been undertaken by a number of national and international bodies, notably the German Monopolkommission, the UK House of Lords and the OECD. SUMMARY OF RESULTS REGARDING PLATFORMS
In the economic literature the fundamental research undertaken by Jean Tirole on multisided markets equally has as one of its main fields of application the internet search services.90 However, while this description has great value with regard to the prospectively developing business strategies of search services, little can be inferred from it with regard to regulatory rules that would address the concerns expressed by stakeholders. In particular, regulation addressing the fundamental rights issues would itself have a large impact on the economics of search services in particular by when ensuring that fundamental rights are properly preserved is connected with costs or affects certain aspects of any existing business model. Furthermore, the competition rules at stake (i.e. Articles 101 and 102 TFEU) aim at preserving a system of undistorted competition as part of the internal market established by the EU resulting from the implementation of regulatory general principles of competition and as such do not attempt to model the potential future effects of intervention on the basis of economic analysis.91
Some authors suggest applying legal rules on the basis of analogies to other existing business like for instance business or people directories (e.g. white and yellow pages) or historic evolution of market places for finance, insurance and alike. However, interests involved of comparators in the offline world appear to be extremely different for the interests which need to be balanced in the case of search services. Typically, the interaction with users of search services is very different from any other system which existed before:
• Users are not charged for the search services they receive;92 • There is an direct interrelation between the behaviour and preferences of the user and the search service it receives; • It is unclear which actions happening during the usage of a search service can be regarded as "consideration" in the sense of some contract laws of EU Member States; • It is unclear, how terms and conditions are introduced in the transactions between the search service and the search seeker and what the nature of the transaction between these two parties are.
89 French Draft Decree on Comparison Websites, notified under reference: 2015/498/F. 90 Rochet, J-C. and Tirole, J. 2003, Platform Competition in Two-Sided Markets, Journal of the European Economic Association, 1(4): 990-1029. 91 Protocol to the TFEU No 27 on the internal market and competition, [2010] OJ C 83/309; see also Wouter Wills, The Judgment of the EU General Court in Intel and the So-Called 'More Economic Approach' to Abuse of Dominance", World Competition, Volume 37, Issue 4, December 2014, p. 16, available at: http://ssrn.com/abstract=2498407 . 92 At least not in monetary value. Whether the data of users is transferred in exchange for the search services and can be regarded as a payment is arguable, given that individual personal data has not the status of a tradable property right.
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Despite all these differences a number of existing legal rules and areas of law can be identified, which are relevant to address in principle some of the concerns voiced by the stakeholders. a) The Gatekeeper Role The concern which has been voiced under the term gatekeeper is mainly that of businesses alleging that they cannot access their customers fairly, and offer these customers a choice, due to an unfair treatment of the search service which intermediates between them and the customer.
Rules regarding such situations have mainly been developed in the area of competition law under the concepts of the essential facilities doctrine or the doctrine of standard essential patents. Moreover, the teleocom regulation has also dealt with very similar concepts of gatekeeper roles in which a multitude of public and private interests had to be reconciled. aa) The essential facilities doctrine
The essential facilities doctrine of EU competition law was developed in the context of abuse of dominance cases under Article 102 TFEU (ex-Article 82 TEC). More specifically, the doctrine is relied upon in relation to a specific type of abuse of dominance, referred to as a refusal to supply or a refusal to deal. Refusal to supply cases are among the enforcement priorities of Commission specified in the Guidance document on the treatment of exclusionary abuses under Article 82 .
In short, when the "essential facilities doctrine" is applied by the competent authorities a holder of an "essential" or "bottleneck" facility is required to provide access to that facility at a "reasonable" price. For example, that could be the case if access to a railroad must be made available on "reasonable" terms to a rival rail company or access to an electricity transmission grid to a rival electricity generator. The types of cases in which the essential facilities doctrine has been invoked under EU competition law include, for example:
• Access to a port infrastructure by ferry operators (Sea Containers v Sealink case) • Media distribution (Bronner case) • Copyright (Magill, IMS Health, Microsoft cases)
I. The conditions for application of the essential facilities doctrine under EU competition law
1. Dominance
The essential facilities doctrine is applied only in respect of undertakings which are found to be dominant in a relevant market. An obligation to deal could not be imposed on an undertaking that has market power but does not pass the dominance threshold.
2. Abuse
The ECJ through is case law has developed and clarified the criteria for application of the essential facilities doctrine. In the Bronner case, it was established that a refusal to supply would constitute an abuse of dominance when:
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(1) the refusal concerns access to an essential facility (product, service or asset which is indispensable to the competitor for carrying out the business in question),
(2) the refusal would prevent the emergence of a new product for which there is potential demand,
(3) the refusal is likely to exclude all competition in a secondary market, and
(4) the refusal cannot be justified by objective considerations.
The CFI judgement in the Microsoft case is thought to have slightly extended the scope of the Bronner test notably in cases concerning IPRs as essential facilities. …. to be continued…
II. Applying of the essential facilities doctrine to the online search market 1. Challenges with the market definition and establishing dominance:
• three-sided market (websites, searchers, advertiser) with two of the sides using the service free of charge; how to effectively take account of competitive constraints on all sides while also acknowledging the interdependencies between the sides;
• possible market definitions: from the narrowest market definition (horizontal online search) to wider alternatives
• relationship between market definition analysis and the dominance concept: constraints exerted by market players who are not included in a narrow market definition should be accounted for when examining if there is dominance
2. Possibility of finding abuse: Assuming that a search engine provider is found to be dominant, the Bronner criteria are extremely unlikely to be fulfilled on this market.
• alternative general search engine providers exist
• “a major share of internet traffic reaches a website not via search engines, but via other channels” – entering the URL, bookmarking, mobile applications, advertisements on other websites
III. General challenges to competition law in tackling refusal to supply cases: The remedy imposed for refusal to supply cases (namely an obligation to supply) is one from which competition law traditionally shies away. The core reasons for that are the following:
• An obligation to supply a competitor is by its essence in conflict with the freedom of contract principle. Aside from undermining the contract law prerogative for private parties to be able to choose trading partners and trading terms, an obligation to supply could also have an economic cost. Overzealous application of an obligation to deal could undermine investment incentives for undertakings. If undertakings that have invested in their brand’s quality and image are subject to an overly strict obligation to deal with their chosen distributors, incentives to improve their brand’s quality or invest in R&D will be undermined.
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• An obligation to supply risks being perceived as protecting the interests of individual competitors as opposed to safeguarding effective competition. The narrow approach of the court under the Bronner criteria limits this risk to a certain extent. In doing so, it establishes a high threshold for finding of a competition law infringement. • Imposing an obligation to supply brings the question of the conditions of supply and most notably the price. If the obligation imposed is one of supply at a reasonable price without specifying the amount, the competition authority risks that an open refusal to deal be replaced with a constructive one by the dominant undertaking which might instead start charging excessively high prices or deteriorating quality of supply. Consequently, such remedies require constant supervision by the competition authorities in order to be effective. This monitoring may however be criticised for being over-interventionalist in terms of constituting effective price regulation.
bb) Rules on standard essential patents A standard can be defined as a “document, established by consensus and approved by a recognized body that provides, for common and repeated use, rules, guidelines or characteristics for activities or their results, aimed at the achievement of the optimum degree of order in a given context”.93 The primary objective of voluntary standardisation is to establish technical or quality specifications for products, production processes or services. 94 Standardisation exists in numerous fields: from electrical engineering to paper technology. For example, the A4 size of sheets of paper is a widely-applied standard.
Standardisation is organised by and for the stakeholders through Standard Setting Organisations (SSOs). There are thousands of standards established on national, European or international level. For example, ETSI95 alone publishes between 2,000 and 2,500 standards every year.96 Standardisation generates benefits both for business and consumers, such as: • Facilitation of international trade • Facilitation of innovation and improving performance in particular by establishing interoperability and compatibility of products, components, services, methods or processes • Ensuring safety and maintaining or enhancing quality • Reducing transaction costs for sellers and buyers97
A standard-essential patent ("SEP"), as the term suggests, is a patent that protects technology which is essential to a standard. A standard agreed by SSOs can and frequently does rely on a number of different SEPs owned by one or more patent holders. This is understandable since
93CEN CENELEC SSOs official webpage
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often the best available technology, which industry experts would like to include in a standard, results from significant R&D investment in a patentable invention.
Once a standard incorporates a SEP, any producer who wishes to manufacture standard- compliant products would need to make use of SEP-protected technology. The SEP holder, thus, acquires a gatekeeper role to the standard, since a refusal to license would prevent the adoption of the standard by other market players. This may give SEP holders significant market power in respect of the relevant product market and the potential to abuse their market power by "holding up" users of the standard.98 If a standard has been agreed and market players have invested in implementing it in their production, those market players would then effectively be locked into the standard and the SEPs. 99 SEP holders could then potentially abuse their gatekeeper role for example by excluding competitors through refusals to license, charging excessive royalty fees100 or imposing terms to which the licensee would not agree but for its lock-in (such as requiring the licensee to give up non-infringement or invalidity claims101).
In this context, due to the gatekeeper role of a SEP holder, a need arises to balance between the interest to reward innovation and the goal to maintain effective competition while also ensuring the benefits of standardisation proliferate. In order to strike that balance, SSOs employ the concept of licensing on fair, reasonable and non-discriminatory (FRAND) terms. SSOs endeavour to get SEP holders to undertake FRAND licensing obligations. For that purpose, SSOs aim to identify possible SEPs early on in the process of standard development and to obtain an irrevocable agreement by patent holders to license on FRAND terms.102 This form of licensing serves the dual purpose of 1) ensuring financial reward of patent for their innovation and 2) allowing for access to the technology included in the standard. SSOs strive to avoid standards based on SEPs for which a FRAND licensing obligation is not undertaken.103
cc) How the telecom sector has dealt with the gatekeeper role TO COME
98 European Commission Press Release, Antitrust: Commission finds that Motorola Mobility infringed EU competition rules by misusing standard essential patents (IP/14/489) 29 April 2014 99 DG Competition, Competition Policy Brief on Standard-essential patents, p.3 100 E.g. patent ambush case (Bellamy and Child) 101 In the Motorola case (Case AT.39985-Motorola, Commission Decision of 29 April 2014) following an injunction based on a SEP, Apple was forced to enter into a Settlement Agreement with Motorola which included a waiver of invalidity and non-infringement claims 102E.g. Article 3 of the CEN-CENELEC Guidelines for Implementation of the Common Policy on Patents (and other statutory intellectual property rights based on inventions) "Any party participating in the work of CEN and CENELEC is requested, from the outset and at the best of his knowledge, to draw attention to any known patent or to any known pending application on patent, either their own or of other organisations that, according to his own judgment, may be considered as an essential patent for the deliverable." 103 For e.g. see Article 2 of the Common Patent Policy for ITU-T/ITU-R/ISO/IEC, available at
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b) Misinformation JUST TO COMPLETE WITH TEXT ON APPLICATION ON UCPD DIRECTIVE TO SEARCH SERVICES c) Application of Fundamental Rights JUST AND H4 TO COMPLETE WITH REGARD TO DATA PRIVACY
F4 to complete with regard to copyright
F1 to draft with regard to the other issues (i.e. e-commerce directive, notice and takedown, implementation by locking of websites, new German Supreme Court ruling etc.)
DG JUST to help us on the application of contract law and legal certainty. d) Lack of transparency Transparency of the current data processing by platforms is not specifically regulated. However, certain case law of the European Court of Justice presupposes transparency requirements notably the judgements in the cases Google Spain104 and Maximilian Schrems105. In essence the Court recognises a wide concept of protection of personal data that gives EU citizens and residents the possibility to control the storage, access and commercialization of their data under certain circumstances. Such control implies also an increased level of transparency of multisided platforms with regard to where they store the data and, upon request by the data subject, what is done with each specific dataset: Only if the data subject knows where its data is and how it is processed it can also exercise its rights. Furthermore, the free flow of data across several countries requires at least minimums standards in terms of substance but also with regard to the efficient enforcement of data protection rules.
How could the Commission address the identified remaining gaps TO COME AFTER COMPLETION OF ALL THE ABOVE SECTIONS
104 Case C-131/12, Google Spain SL, Google Inc. v Agencia Española de Protección de Datos (AEPD), Mario Costeja González. 105 Case C‑362/14, Maximillian Schrems v Data Protection Commissioner, joined party: Digital Rights Ireland Ltd.
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3.5 Key characteristics relevant for policy
- high market concentration, high economies of scale,
- role in access to information about products / services / politics,
- vertical integration of main players,
-collection of personal data,
- collection of commercial data,
3.6 Key issues
- transparency of search results (involving paid for links and/or advertisement)
- transparency with regard to collection and use of data,
- bottleneck: access of suppliers to consumers,
- risk of discrimination,
4. Social Media Platforms (ALASTAIR)
4.1 What is a social media platform ("SMP")?
There are a plethora of definitions of SMPs present in the literature on platforms. Gebicka and Heinemann define SMPs as "web-based services that allow individuals to construct a public or semi- public profile within a limited forum, to articulate a list of other users with whom they share a connection (‘friends’ on Facebook), and to view and traverse their list of connections and those made by others within the system"106. Rieder argues that the capacity to interface and create relevance for a variety of actors and use practices is, in fact, the central characteristic of SMPs (Gillespie in Rieder). Kietzmann details key characteristics of SMPs, or functional building blocks. These include the notions of identity, conversations, sharing, presence, relationships, reputation and groups (Kietzmann). Opinions differ as to whether certain 'platforms' such as Twitter or YouTube fit the definitional criteria. Twitter reflects certain characteristics of SMPs, in addition to those of micro-blogging websites. For instance, unlike other SMPs its service allows sharing of short text messages of 'tweets'
106 Gebicka, A and Heinemann, A, Social Media and Competition Law, World competition : law and economics review 2014, v. 37, n. 2, p. [149]-172; Danah Boyd & Nicole Ellison, Social Network Sites: Definition, History, and Scholarship 13 J. Computer-Mediated Communication 210, 211 (2008)
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with anyone who decides to 'follow you', i.e, read what you post on your profile107. Similarly, YouTube's services undoubtedly contain a social element, mixed with other services.
4.2 Main players in the EEA
1. Which are the main platforms? When were they created?
Active user accounts on SMPs now equate to roughly 29% of the world's population108. The average social media user spends 2 hours and 25 minutes per day using social networks and microblogs109. The main SMPs by user popularity can be seen below:
Facebook continues to dominate the global social media landscape, claiming 1.366 billion active users (January 2015)110. Crucially, 1.133 billion of the platform's global users – 83% of the total – now access the service through mobile devices. Tencent extended its dominance of Chinese-language social
107 For e.g. see Encyclopaedia Britannica's definition "Twitter": online microblogging service for distributing short messages among groups of recipients via personal computer or mobile telephone. Twitter incorporates aspects of social networking Web sites, such as Myspace and Facebook, with instant messaging technologies to create networks of users who can communicate throughout the day with brief messages, or “tweets.” http://www.britannica.com/topic/Twitter 108 http://wearesocial.net/tag/statistics/ 109 http://wearesocial.net/tag/statistics/ 110 http://wearesocial.net/tag/statistics/
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networks, with Qzone's 629 million active accounts leading the pack. In addition, VKontakte retains top social media spot in Russia – the latest data suggests the platform has around 100 million monthly active users. Social media platforms were first created in the late 1990s – by the likes of AOL, ICQ, classmates.com and sixdegrees.com. These SMPs were among the online meeting places that allowed users to communicate with a central system where they could download files or games and post messages to other users. Sixdegrees.com, created in 1997, was one of the very first SMPs to allow its users to create profiles, invite friends, organise groups and surf other user profiles. Friendster utilised this concept, refining user groups into 'circle of friends'. Within a year of Friendster's launch in 2002, the site boasted more than 3 million registered, generating significant investment interest. Aimed at the young adult demographic with its feature- filled environment, mySpace was one of the leading SMPs in the mid-2000s (JRC). The platform was, however, usurped by the subsequent success of Facebook. Launched in 2004 as a Harvard-only exercise, the SMP quickly grew to a valuation of USD 104 billion by 2012. Facebook has gained traction with consumers on a global scale thanks to its ease of use, easily-accessed features, memorable name – attempting to promote honesty and openness in a social space. In terms of its business model, its open API has made it possible for third-party developers to create applications that work within Facebook itself on its app store.
2. What is their valuation / revenue?
SMP Valuation ($ billion)111
Facebook 200
Instagram 35
Twitter 23
Snapchat 15
Pinterest 11
3. Which other types of companies are in competition with these platforms?
111 We are social media (March 2015) http://wersm.com/how-much-are-social-networks-really- worth/
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The rapid rise in mobile computing (smartphones, tablets) has changed social networking. Certain photo and video-sharing applications, such as Snapchat and Instagram, exist entirely on mobile. Competing in the social media market is no longer being seen as strictly zero-sum. The registration process for hundreds of applications on mobile devices can be completed using already-existing Facebook, Gmail or Twitter accounts.
4.3 Business models
1. Who are the users?
Social media users (by active accounts) can be seen below:
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A survey conducted by Princeton Survey Research Associates International (PSRAI) in the USA in September 2014112 shows % of SMP users from the US population. The use per platform is as follows:
112 telephone interviews with a nationally representative sample of 2,003 adults living in the continental United States.
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113
It is clear that Facebook continues to dominate the global social media landscape. Recent statistics from September 2015 puts the total number of monthly active Facebook users at 1.440 billion114. Of these, it is estimated that 874 million are mobile Facebook users. The global reach of Facebook is also evident, with more than 70% of users from outside the US 115 . In addition, the fastest growing demographic of the platform is made up of people above 35 years of age.
2. What services does the platform deliver to all groups of users?Impact of SMPs
Most networks typically offer a number of basic functions, including a user profile, a list of contacts and a messaging feature116. SMPs offer their services worldwide as a matter of principle, so that communication can take place globally. Services are distinguished by different functionalities and user interfaces, the consequence of which is that these services are used in different ways and users access several services at the same time. A highly precise definition on the user side is not possible because
113 see PewResearchCenter, Social Media Usage – 2005-2015: Nearly 65% of adults now use social networking sites – a nearly tenfold jump in the past decate, http://www.pewinternet.org/files/2015/10/PI_2015-10-08_Social-Networking- Usage-2005-2015_FINAL.pdf and PewResearchCenter, Social Media Update 2014: While Facebook remains the most popular site, other platforms see higher rates of growth http://www.pewinternet.org/files/2015/01/PI_SocialMediaUpdate20144.pdf 114 Statistic brain http://www.statisticbrain.com/facebook-statistics/ 115 Business Models in Social Networking (Falch, Henten, Tadayoni, Windekilde) 116 monopol
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of different substitution relationships and of the possibility to use different services in parallel ('multi- homing')117.
Taking the example of YouTube as a SMP, it delivers a public video-sharing service, where end- users upload and share video clips. As such, it enables people to create friends and to develop social relationships. A channel page is the YouTube equivalent of what other social networking sites call 'profile' pages and includes personal information as well as a list of videos made by the participant, their subscribers, favourite videos, and subscriptions to other YouTube participants. In his article, Lange outlines what he sees as the five categories of YouTube users: former participants; casual users; active participants; YouTubers; YouTube118. It is worth noting that the vast majority of the content is user generated, however, the most viewed videos on the service are typically uploaded by professionals. Copyright issues with the services delivered by the platform are pervasive – such as uploading copyrighted content without the permission of the right holders.
3. How does the platform make money?
SMPs potentially have a variety of sources of income. Indirect network effects (where the utility of the individual users depends on the presence and usage of the network by other users) are at the heart of the business model of SMPs. This is also backed up by Hagiu: 'the economic characteristics of platforms are that they coordinate the demands of distinct groups of customers who are dependent on each other'. Network effects are also built into their business model in that users experience a strong lock- in effect due to the network character of these platforms. SMPs do not generally as yet view their users as potential sources of income, as this would involve charging individual users. If a platform starts charging for its services, it is more than likely that users will migrate to other platforms. Having said this, it depends on the categories of services and of users – some dating services are based on end-user payment. Furthermore, some platforms offer premium services (ie. LinkedIn). Advertising is the basis of the vast majority of SMP business models to generate income. It is the central feature of Facebook's business model, for instance. Revenue from advertising can also be expanded heavily by selling targeted advertisement space. Another potential source of income is from application developers. On the Facebook platform, application developers which are verified by Facebook pay them a fee. With respect to Twitter,
117 monopol 118 Business Models in Social Networking (Falch, Henten, Tadayoni, Windekilde)
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application developers are also the second potential group of users. To the extent that applications and content are used, application developers and content providers can charge the users and pay a share of this to the social network providers or the networks can collect the fees and distribute a percentage to the application or content providers. This same 'platformisation' can be observed in messaging services, especially with the Chinese platforms. A further source of income will come from selling information on the users to advertisers. Although there are privacy issues involved, anonymous information can still be of great value to advertisers. Information is undoubtedly a great opportunity for social networks as they can assemble detailed information on their users: their profiles and their usage patterns. It ought also to be noted that the major SMP are providing their own advertising service and therefore charge advertisers directly. Lastly, SMPs can also potentially make money from venture capitalism, which remains an important source of funding. Venture capitalist put money into these operations on the expectation that these SMPs will eventually make money.
3.1. YouTube
YouTube's services are built on user generated content with the end-users as producers and consumers of the content. YouTube has become one of Google's big growth drivers, generating $5 billion to $10 billion in revenue. YouTube does not have any creative and content producing resources and their success lies in the provision of an easy to use, global platform, where the ordinary users and professionals upload and share videos with each other. To create incentives for producers of both user generated content and professional content, YouTube has developed a partnership program, where the content generators get a share of the generated revenue. Further, 'pay for content' has also been deployed for professional content as a supplementary revenue model for YouTube alongside advertising. 'YouTube Red' is a new subscription service that will cost $10 a month for the same videos ad-free119. Red will work across the original YouTube as well as YouTube's gaming app, its forthcoming music app and Google's Google Play music service120. YouTube's financial design is based on advertisements which are used in the following ways: • In-video graphical and text advertisements • Post-roll advertising
119 http://www.nytimes.com/2015/10/22/technology/youtube-introduces-youtube-red-a-subscription- service.html?_r=0 120 Simultaneously announced YouTube Originals, a slate of original programming that will be available only on the paid service
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• Pre-roll advertising • Regular banners • Sponsored ads
3.2. Facebook
Facebook's organisational design includes a plethora of actors in their value chain: Facebook, application developers, access providers, handsets vendors, operators and users. A key feature of Facebook's technological design is its application platform, which enables the development of third- party social-networking applications. Third party developers on Facebook include: Microsoft, Amazon, Red Bull, Washington Post and Slide. There are now 42 million Facebook pages, and 9 million apps and websites integrated on the SMP121. Facebook users download an average of 20 million apps each day122. Largest Facebook app developer Zynga, a social gaming company, contributes with as much as US$50 million per year in ad revenue. In addition, Facebook also advertise on the platform. Most of its advertising revenue comes from an ad deal with Microsoft (beginning in 2009). Its revenue from advertising is, however, dwarfed by Google – who make 190 times the revenue of Facebook per page view.
Facebook M&As123
Company Service Acquisition Price Details Date
WhatsApp Messaging February $22 over 500 service 2014 billion124 million people using the service each month
121 http://www.adweek.com/socialtimes/facebook-platform-supports-more-than-42-million-pages- and-9-million-apps/278492
122 http://www.statisticbrain.com/facebook-statistics/
123 http://assets.entrepreneur.com/article/1416584509-instagram-whatsapp-snapshot-facebook-acquisitions- infographic.jpg?_ga=1.23579065.2082898973.1450452367 124 - $4 billion in cash; $12 billion in facebook shares; additional $3 billion in restricted stock units to be granted to WhatsApp founders and employees that will vest over four years subsequent to closing
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Branch conversation January $15 billion not a full Media service and 2014 acquisition, link sharing because the team has joined FB
Face.com facial June 2012 between recognition $55 and software for $100 m tagging
Hot Studio design March 2013 agency
Instagram photo April 2012 $1 billion prevent a sharing competitor
website getting it first
Parakey web- July 2007 first operating acquisition
system
Friendfeed real-time August 2009 $50 m second news feed acquisition
Octazen contact February importer 2010
Friendster network of August 2010 $40 m including (patents) social media advertising, patents virtual
payments
Oculus VR virtual reality March 2014 $2 billion headsets
Others125
[INSERT SOURCE HERE]
125 Sharegrove; Sports stream; Moves
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3.3. Twitter
Twitter is a SMP based on a microblogging platform allowing users to post short messages and read messages from others. Its added value is the platform's ability to report important news at a faster pace than any other social media. Twitter's value chain is composed of the following: Twitter, application developers, access providers and users. Falch et al identify three types of user of the platform: broadcasters, acquaintances and users following a much larger number of people than following them126. The 'acquaintances' users are those with reciprocity in their relationships including private users, and this constitutes the largest group. Twitter itself provides the software for the basic services and operates the common platform. Several thousand applications have been developed on the platform by third parties, for instance browser plug-ins, photo and video-sharing applications. Twitter generates little revenue from users sending and receiving tweets, nor does it charge subscription fees. Almost all of Twitter's revenue – about 85% of it – comes from advertising on its site127. There are three main ways for a company or an individual to advertise on the SMP: by promoting a tweet that will appear in people's timelines, promoting a whole account or promoting a trend. Twitter then tends to charge its advertisers according to the amount of interaction their content generates. Data licensing is Twitter's second major revenue stream. The micro-blogger sells its public data, which often adds up to about 500 million tweets each day128. Because the tweets are public, consumers also have access to this data.
4.4 Market structure
1. Is the market concentrated / fragmented – what are the market shares?
• Preliminary question: How do we define the market?129
126 Business Models in Social Networking (Falch, Henten, Tadayoni, Windekilde) 127 http://www.bbc.com/news/business-24397472 128 http://www.bbc.com/news/business-24397472 129 Facebook is an internet website, but the internet market as such is particularly broad and heterogeneous, with websites varying in scope and importance for users (e-mail, research, shopping, entertainment, advertising, etc.). In consequence, we must identify the distinguishing characteristics of Facebook as a website, what services it offers to its users and what it receives in return, in order to achieve a relatively straightforward definition of the relevant market – the prerequisite to the analysis of whether there is a dominant position and abuse thereof. Gebicka, A and Heinemann, A, Social Media and Competition Law, World competition : law and economics review 2014, v. 37, n. 2, p. [149]-172
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The problem with the traditional SSNIP test is that SMPs rarely charge money to one side of the platform; proposition for a SSNDQ (small but significant non-transitory decrease in the quality) test130. If we consider that Facebook is in the business of ‘monetizing of users’ information by online advertising, companies like Google or Facebook would operate on the same relevant market (the kind of services proposed to non-advertising side of the platform over the internet would be perceived as an instrument to obtain information on users who use the offered services). A narrower definition of the market would better take into account the user side of the market. This is important given that the realisation of revenues depends on the success of the main activity of the platform. Therefore, the substitutability of the specific service from the perspective of its users is also relevant in assessing competitive pressures. The market must also take into account many players with mostly national coverage (e.g. StudiVZ in Germany, Grono in Poland)131, in addition to a concentrated global market characterised by a few large players (most prominently – Facebook132).
2. What are the factors leading to high / low concentration (network effects, lock-in, economies of scale?)
Concentration tendencies are favoured by a lack of interoperability between different social networks133. Operators of relatively large networks have little incentive to enable this interoperability with other networks since they are interested in retaining users within their network. Moreover, there may be high switching costs between SMPs because of strong direct network effects and the effort needed to coordinate user groups 134 . Any lock-in effect may be heightened by the lack of data portability.
3. Is entry likely to be difficult for newcomers (what are the main barriers)?
4. What might the market look like in the future (are these platforms expanding into new areas?)
130 Gebicka, A and Heinemann, A, Social Media and Competition Law, World competition : law and economics review 2014, v. 37, n. 2, p. [149]-172 131 Gebicka, A and Heinemann, A, Social Media and Competition Law, World competition : law and economics review 2014, v. 37, n. 2, p. [149]-172 132 See the World Map showing the popularity of social networks around the world with the changes and evolution of Facebook between August 2008 and October 2011, http://oxyweb.co.uk/blog/ socialnetworkmapoftheworld.php (accessed 24 Oct 2015) 133 monopol 134 JRC
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4.5 Impact of Social Media Platforms
1. On consumers (how many in EU, what do they gain?)
Advancements in the internet and the emergence of Web 2.0 along with social media have empowered customers135. General availability of the internet has given individuals the opportunity to use social media, from email to Twitter and Facebook, and to interact without the need for physical meetings. Consumers have social interactions through social media such as online forums, communities, rating, reviews and recommendations. In their article 'Social Media and its Impact on Consumers'136, Ioanas and Stoica highlight the linkages between social media and e-commerce. They argue that the emergence of online stores have turned users into consumers, with social media providing a new channel to acquire product information through peer communication. By using social media, consumers have the power to influence other buyers through reviews of products or services used. The ability of SMPs to engage business to interact with potential consumers and their immense popularity has revolutionised marketing practices such as advertising and promotion.
2. For suppliers (how many in EU, what do they gain/lose?)
Companies are using social media to advertise their products and build consumer loyalty. Interactions and feedback from consumers helps businesses to understand the market, and fine-tune their products and strategies.
3. Impact on innovation
Hagiu • In theory, YouTube, Twitter, Facebook and blogs should make it possible to engage their customers in new and diverse ways • Managing corporate communication and brand diffusion across these new communication channels is quite different from companies are used to
135 Hajli, N (2014). 'A Study of the Impact of Social Media on Consumers'. International Journal of Market Research, vol. 56 (3). 136 Ioanas, E; Stoica, I (2014). 'Social Media and its Impact on Consumers Behaviour'. International Journal of Economic Practices and Theories, vol. 4 (2).
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• Difficult and costly to maintain a unified voice across all channels and to control information flows to the outside world • Product strategy o Companies are under increasing pressure to significantly shorten their product cycles and rely much less on well-choreographed and fully-controlled product releases o Makes it possible for some companies to leverage more useful input from customers • Start-ups o New communication technologies and channels have made it easier to get on the map quickly and to create buzz and word-of-mouth o Problem is that start-ups are now subjected to new and not necessarily desirable pressures, which are exclusively related to communication channels • Need to recognise that the new communication channels will become an integral part of the business world
4. General effect on the economy: jobs, growth
5. Impact in other areas (politics, environment, equality…)
• Politicians need to jump on social media bandwagon • Role of social media websites in many elections around the world • Social media has also served to rally people to a cause, inspiring mass movements and political unrest in many countries • Socialisation o Social networks offer the opportunity for people to re-connect with their old friends and acquaintances, makes new friends, trade ideas, share content and pictures, and many other activities o Users can stay abreast of the latest global and local developments, and participate in campaigns and activities of their choice • Negatives o Cyber bullying, online harassment o Impact on productivity, privacy
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4.5 Key characteristics relevant for policy
- strong direct network effects,
- collection and use of personal data,
- filtering and recommendation of content (feeds),
- role of UGC – user generated content
- vertical integration,
- platform for other services (through APIs)
4.6 Key issues
- high switching costs for users due to network effects,
- lack of transparency on data collection,
- presence of illegal / pirated content,
- access to data (API),
1. In the literature?
Given the particular importance of direct network effects for SMPs, and the associated likelihood of high concentration levels, new entrants may find it difficult to compete for users137 – especially in lack of data portability options. The need for private data portability (possibly through implementing a system of standards for the semantic interlinking of social media outlets138) is also an issue that has been the subject of debate139. Although in relation to consumer communication applications (such as Whatsapp) the Commission concluded that a lack of data portability would not constitute a significant barrier to consumer switching140, this could be different when considering SMPs such as Facebook and Instagram, where consumers amass large amounts of personal data that are important to the richness of the user experience (i.e. photos and past experiences rather than mere chat history).
Given their very significant user groups, SMPs also play an increasingly important role in society that goes beyond the provision of communication services; they can constitute authoritative sources of information, they effectively enhance oversight (human rights protections, fair elections, etc.) and
137 A similar concern was raised in relation to consumer communication applications in the case M.7217 Facebook / Whatsapp, 138 Breslin, J. et al, 'SIOC: Content Exchange and Semantic Interoperability Between Social Networks', W3C Workshop on the Future of Social Networking of January 2009, available at: https://aran.library.nuigalway.ie/bitstream/handle/10379/629/322.pdf?sequence=1&isAllowed=y [accessed at December 2015]. 139 See in this respect, for example, the Study for the ECON Committee of the European Parliament of July 2015 and entitled 'Challenges for Competition Policy in a Digitalised Economy', p. 43, available at: http://www.europarl.europa.eu/RegData/etudes/STUD/2015/542235/IPOL_STU(2015)542235_EN.pdf [accessed at December 2015]. 140 Case M.7217 Facebook / Whatsapp, para. 113.
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they can be (ab)used to drive public opinion. Key questions that arise in this respect are (i) whether and to what extent the operators of SMPs should play an active role in reviewing and possibly 'moderating' third-party content (duty of care), (ii) whether such active SMPs would risk effectively limiting citizens' fundamental right to freedom of expression and whether this would require the setting of standards/industry best practices, (iii) whether such active SMPs would automatically be liable for illegal content (SMP could in that case for example be successfully sued on defamation grounds), and (iv) notice-and-action regimes in general have a chilling effect on citizens' right to freedom of speech.141
In relation to SMPs, the question of whether the existing competition rules are fit-for-purpose is furthermore particularly relevant. Facebook has for example been able to acquire both Whatsapp and Instagram, notwithstanding that the latter services could already have been engaged in competition with Facebook and could moreover have grown into full, alternative SMPs given their very substantial user bases.142
- social media platforms present numerous challenges to empirical research, making it difficult from researching cases in offline environment, but also different from studying the 'open' web Bernhard Rieder
Studying facebook via data extraction: the netvizz application (Rieder) Bernhard Rieder
- researchers from many areas of the human and social sciences have moved quickly to study the platform: a recent review article identified 412 peer-reviewed research papers that follow empirical approaches, not counting the numerous publications employing conceptual and/or critical approaches Bernhard Rieder
- study of social networking services like Facebook introduces a number of challenges and considerations that makes the scholarly investigation of these services, their users and the various forms of content they hold significantly different from the study of the open Web Bernhard Rieder
2. in the public consultation?
3. raised by experts in workshops / roundtables?
141 Similar questions have been the subject of extensive debate in the United States. See, for example, Seltzer, W., 'Free Speech Unmoored in Copyright's Safe Harbor: Chilling Effects of the DMCA on the First Amendment', 24 Harvard Journal of Law & Technology 1 (2010), available at: http://jolt.law.harvard.edu/articles/pdf/v24/24HarvJLTech171.pdf [accessed at December 2015]; Tushnet, R., 'Power Without Responsibility: Intermediaries and the First Amendment', 76 George Washington Law Review 101 (2008), available at: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1205674 [accessed at December 2015]. 142 See in this respect also the Study for the ECON Committee of the European Parliament of July 2015 and entitled 'Challenges for Competition Policy in a Digitalised Economy', p. 55, available at: http://www.europarl.europa.eu/RegData/etudes/STUD/2015/542235/IPOL_STU(2015)542235_EN.pdf [accessed at December 2015].
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5. Mobile Operating Systems and App Stores
5.1 What are mobile ecosystems and app stores
App stores, such as Google Play (Android), App Store (iOS), and Windows Store are online digital distribution platforms which connect users of mobile devices with the developers of mobile applications.
It is estimated that there are more than 1,5 million different apps available to consumers in the two main app stores (1,5 million apps in the App Store and 1,6 million in Google Play) and more than 340,000 in the Windows Store 143. Whatever can be done using a mobile phone, it's likely that "there's an app for that"144. 100 billion apps had been downloaded from Apple's App Store alone from July 2008 to June 2015145.
A study by Gigaom for the European CommissionError! Bookmark not defined. found that in 2013 EU developers took in €17,5 billion in revenue and it was forecasted to increase to €63 billion in 2018. In addition to €6 billion from in app sales, in-app spending for virtual goods and advertising, EU developers recognized €11.5 billion in 2013 from contract labour. The study estimated that the EU app-developer workforce would grow from 1 million in 2013 to 2,8 million in 2018 with additional support and marketing staff resulting in total app economy jobs of 1,8 million in 2013, growing to 4,8 million in 2018. By comparison, the European film industry employs over 373 000 people, and reached revenues of some €60 billion in 2011.
With the emergence of new devices, such as tablets, wearables and in-car systems and the increasing number of applications, the importance of the "App economy" for the European Union will continue to grow.
Mobile ecosystems as online platforms
For the purpose of this report, online platforms have been defined as online services which bring together users who derive a benefit from interacting with each other. Mobile ecosystems fall into this category to the extent that they enable the online interaction of application developers, advertisers and smartphone users. To better understand the role of mobile ecosystems in this interaction, it is important to understand the factors which led to their emergence and benefits that all participants derive from them.
From feature phones to smartphones: emergence of modern smartphones and mobile ecosystems
The emergence of apps and app stores would not have been possible without the emergence of the modern smartphone and the creation of vibrant mobile ecosystems bringing together hardware manufacturers, network operators, software developers and users.
143 http://www.statista.com/topics/1729/app-stores/ accessed 23.10.2015 144 Apple trademarked this phrase in 2010. 145 http://www.statista.com/statistics/263794/number-of-downloads-from-the-apple-app-store/ accessed 26.11.2015
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Dominant role of operators In the pre-smartphone era, network operators were in control of most of the mobile ecosystem. They were in control of the relationship with the end-user and determined which devices, with which features and capabilities their subscribers would be able to use on their network. Operators were the main channel for handset manufacturers to reach the consumers and most subscribers purchased handsets subsidized by the operator. Network operators determined which features and user interface will be available in the devices they carry. The device manufacturers relied on the network operators to promote and sell their devices making minimal effort to advertise and sell directly to the public.
Most feature phones relied on proprietary software operating systems (OS). For some high-end feature phones manufacturers licensed third party operating systems like Symbian or Windows Mobile for their smartphones. The first smartphone OS(s) allowed independent developers to develop applications for mobile phones, but the development process was tedious and not easy to use. For the feature phones, the only option available to the application developers was to create Java applications using a limited J2ME API (application programming interface) set. As a result, the only applications available for feature phones were Java games developed by large gaming houses that could afford to spend time and money needed. Given the limited API support, the application ecosystem was small and fragmented with multiple app stores, making it very confusing for the users to find and download applications. Carriers have offered applications for sale to their customers already starting in the early 2000s, the uptake and the revenue were however very limited.
In comparison to modern smartphones, their earlier versions had limited internet browsing capabilities and relied on GSM (a 2G standard) circuit-switched networks for voice and data communications. GSM is ideal for the delivery of voice but has limitations for sending of data146. Phone manufacturers (Nokia, Ericsson, Motorola, Unwired Planet) addressed these limitations by introducing the Wireless Access Protocol, which provided limited internet browsing capabilities and access to a variety of services offered by operators (such as Vodafone Live! or T-Mobile T-Zones). However, WAP required significant additional effort by content providers to develop web pages in this format and was ultimately entirely discontinued by 2013 as all modern smartphones moved to support HTML, CSS and JavaScript thanks to higher bandwidth data transfer.
Transition from carrier-controlled featured phones to open web and application based devices
146 In 2000 the introduction of General Packet Radio Service (GPRS) added packet-switched functionality and ‘kick started’ the delivery of the Internet on mobile handsets. Followed by EDGE
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Source: Business Insider (Chart to be replaced with EU figures)
In 2007 the introduction of Apple's iPhone not only re-energized the Smartphone industry, it changed the focus from carrier-controlled featured phones to open web and application based smartphones (Elkin, 2011).
The advent of modern smartphones (with the introduction of Apple's iPhone in 2007) not only revolutionized the mobile phone design but also transformed the mobile ecosystem structure changing the balance of power between the incumbents (network operators and device manufacturers) and new entrants such as Apple and Google. With the advent of the iPhones and Android based devices network operators lost their role as the drivers of the mobile ecosystem.
The new hardware and 3G data networks gave users the full benefits of a high speed Internet connection and web browsing as well as the ability to download and install third party software which significantly expanded the functionality of mobile devices.
The rapid improvements in the wireless communication technology (expansion of both cellular networks and Wi-Fi), and computing power of mobile devices opened a vast opportunity for mobile devices to become much more than simply a communication device.
The switch from carrier-controlled feature phones (on which all services were offered by the carrier) to open platforms on which applications and services are offered by multiple actors started a new era for consumers, who now demanded a range of new applications far beyond the software that was delivered with their new smartphone. The fact that consumers were already familiar with networked computing also contributed to the rapid consumer adoption of mobile applications.
This shift in the market is important to understand, as it requires the organizations to increasingly rely on their partners to provide a lot of the complementary pieces. The technological evolution opened up the possibilities for a large variety of services to be based on the smartphone technology. The uncertainty about which use of the technology the users will value most favoured exploration and experimentation. The top-down hierarchical design decisions made by network operators and device manufacturers had to be replaced by a very different business strategy to succeed. Since no single company, whether a network operator or device manufacturer, could deliver all of the applications requested by consumers, companies which were able to create a thriving ecosystem of devices and application developers quickly
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emerged as the leaders. The successful mobile platform sponsors created the conditions and incentives for third-party developers to come up with applications for the underlying technology and participate in a wide variety of value creation experiments.
The success of Apple, Google and Microsoft could be explained, at least in part, by how strategic they have been in creating a platform that drew in a community of partners (their ecosystems) to create more value for their customers. Given their prior experience with the creation and running of successful Internet platforms, Apple, Google and Microsoft were well placed to do that and to reap the substantial benefits of this new "app economy". At the same time, the smartphone pioneers including Nokia and Blackberry rapidly lost market share.
Top 4 smartphone vendors (world market share)
2007 2014
1 Nokia (Symbian) Samsung (Android)
2 RIM (Blackberry OS) Apple (iOS)
3 HTC (Windows Mobile) Huawei (Android)
4 Apple (iOS) Xiaomi (Android)
Source: IDC and Statista (need better data)
Top 5 smartphone vendors
Period Samsung Apple Huawei Xiaomi Lenovo Others
2015Q2 21.4% 13.9% 8.7% 5.6% 4.7% 45.7%
2014Q2 24.8% 11.6% 6.7% 4.6% 8.0% 44.3%
2013Q2 31.9% 12.9% 4.3% 1.7% 5.7% 43.6%
2012Q2 32.2% 16.6% 4.1% 1.0% 5.9% 40.2%
Source: IDC, Aug 2015
Global smartphone sales 2007 - 2014
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Since Apple, Google and Microsoft had an existing relationship with the consumers and could market the devices compatible with their ecosystems directly to consumers, the control of network operators over the design, functionalities and marketing of the devices was largely reduced. The iPhone was designed and developed in close integration with the component manufacturers but without any input from any network operators.
In 2013 smartphones accounted for the 49% of total mobile phone sales in the first quarter of 2013 (need data for 2015), coming tantalizingly close to overtaking feature phone sales for the first time ever, according to Gartner. That share is up from 44% a quarter prior and 34% the same quarter a year ago.
Mobile Service Operators made a last attempt to regain their key role by launching the Wholesale Applications Community in 2010. The twenty-four biggest mobile network operators, including China Mobile, Deutsche Telekom, Vodafone, NTT DoCoMo, Telefonica, SK Telecom, Sprint, AT&T, Verizon Wireless, and hardware manufacturers including LG, Samsung, and Sony Ericsson joined forces to provide a cross-platform environment for easy application development, where an app developed for one platform can run seamlessly on on a variety of devices, operating systems and networks. However, this broad coalition of companies (48 companies were members at some point) failed to attract developers who were wary to use mobile network operators as a platform to reach end users. The WAC organisation came to an end in 2012 and its technology assets were sold. This attempt to move the balance of power towards carriers was ultimately unsuccessful and they currently mostly remain as the providers of bandwidth for handling ever-growing data needs of the consumers.
After nearly two decades when network operators led the developments in the mobile phone industry, Apple, Google (and later Microsoft) asserted their power over the emerging smartphone ecosystems.
Mobile ecosystems and the solutions stack
The solution stack encompasses the key elements of the mobile ecosystem. It has evolved along with the transition from basic mobile phones to smartphones and has grown progressively more complex with the addition of services, OS features and content. Its main elements are:
• Hardware, which includes the sub-components that go into a mobile phone like display, camera, memory, microprocessors and GPU. • Device is the actual phone, which integrates the hardware components and the software components like the OS and applications. • Software includes the OS and other capabilities that form the OS like the user interface.
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• Services component includes the services available to the users that enhance the functionality of a mobile phone like cloud storage and backup, navigation, voice commands or natural language input and so on. • Content includes applications making use of the services.
The solution stack now is highly complex, with the devices integrating more hardware components like faster microprocessors, NFC chips and the OS evolving to accommodate them. In addition, the services have now grown to include sophisticated payment mechanisms like NFC, cloud backup and storage, social network integration, natural language user interface and mobile advertisements. The OS vendors created some of these services and included them as a part of the platform, while others services were launched as applications but were later absorbed into the platform.
5.2 Main players and market structure As the example of the most successful mobile ecosystems demonstrates, the key to controlling the ecosystem is the control of the mobile operating system and, to a certain degree, the control of the associated services.
Main mobile operating systems
Period Android iOS Windows Phone BlackBerry OS Others 2015 82.8% 13.9% 2.6% 0.3% 0.4% 2014 84.8% 11.6% 2.5% 0.5% 0.7% 2013 79.8% 12.9% 3.4% 2.8% 1.2% 2012 69.3% 16.6% 3.1% 4.9% 6.1%
Source: IDC, Aug 2015
A mobile OS is responsible for identifying and defining mobile device features and functions, including keypads, application synchronization, email, thumbwheel and text messaging. A mobile OS is similar to a standard OS (like Windows, Linux, and Mac) but is relatively simple and light and primarily manages the wireless variations of local and broadband connections, mobile multimedia and various input methods.
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The existing ecosystems in mobile phone market are built on top of smartphone OS platform, as it provides the capability to run applications and services for the ecosystem participants. Also, the OS developers provide the supporting infrastructure like SDKs, application stores, support forums and payment mechanisms, needed for development of these application and services.
There are three main types of mobile operating systems:
A. Manufacturer-built proprietary operating systems where the operating system developer (the owner) is also the hardware manufacturer.
• Apple iOS: The iPhone operating system from Apple, derived from Mac OSX. Apple did not support the ability to develop third party applications till the release of iOS 2.0 in July 2008. It is one of the most popular Smartphone devices and enjoys the highest operating profits in U.S., due to its integrated approach (end-to-end services). • BlackBerry OS: Originally made for business purposes and the first Smartphone OS, which brought Smartphone to daily life of people, RIM Blackberry was a sensation in the early 2000s. But this platform is also losing its market share because of strong competition. It's a closed- source proprietary system. RIM App World was launched in April 2009, and has seen a rapidly falling market share in the last 4 years.
B. Third-party proprietary operating systems where the operating system developer (the owner) will license its operating system, usually for a fee, to third-party hardware manufacturers (Original Equipment Manufacturers or OEMs).
• In this method, similar to Microsoft’s personal computer operating system (Windows) model, the devices will have a consistent appearance and behaviour. There is little scope for customisation of the operating system by the OEMs. • Microsoft Windows Phone (Mobile): XXXX
C. Free and open source operating systems where the operating system developer (owner) will release the operating system via the open source license method.
Open source operating systems are developed by a company, a group of companies or a community of developers. Customisation of the operating system is usually allowed to a certain degree (within the parameters of the license agreement).
• Google Android: This is a software platform and operating system for mobile devices based on Linux kernel and developed by Google but later on by Open Handset Alliance (OHA). Its native language is Java which is the officially supported language. In this applications can be written in other languages also but later on it is compiled to ARM native code. • Symbian: XXXX
The main operating systems (iOS, Android, Windows) are moving into other areas:
Mobile operating systems vs other OSs
• TV OS
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• Wearables • Tablets • Laptops • Cars
Open vs closed mobile ecosystems
Along with the makers of the OS(s), there are numerous other organizations, involved at every level of the solution stack. Their role and freedom of action differs depending on the level of openness of the mobile ecosystem. Companies controlling the ecosystems made different choices as to which parts of the mobile solutions stack to keep full control of and which parts to open to third-party partners providing complementary products or services.
The main competition between mobile OS's is said to be between "open" and "closed" systems. The two big players, Google and Apple, have adopted very different approach to reach ecosystem leadership position. As Steve Jobs points out, it is not the war of open systems and closed systems, but a war between "integrated and fragmented systems".
Monetization
The three sponsors of mobile ecosystems have adopted very different models of monetizing their operating systems and governing their app stores.
The difference in the approach stems from the different ways in which these companies make money and from where their competitive advantages lie. Apple maintains full control over the key hardware components including key hardware components, design of the device, operating system, app store, a number of apps and associated services (music, books, maps, mail, calendar, cloud storage, messaging, video calls) sells hardware and software
Microsoft sells software. The majority of its revenue comes from software installed on PCs and servers. Microsoft's entry into the mobile operating systems market with the purchase of Nokia is fairly recent. The Windows Phone app store was launched in May 2012. Microsoft is able to leverage its strong position on the PC operating systems market. Windows 10 is available across both platforms and enables customers to use applications purchased on one platform across all platforms.
Google is mainly sells data to advertisers
[Need to think more about this] Apple makes a profit from the high margins it charges on its high-end hardware. Google gives away Android and most of its apps for free earning nearly 60 billion USD by monetizing the data that is gathered from the use of these devices. Microsoft XXX . Regardless of the differences all companies are interested in growing their ecosystems.
Control over elements of the mobile solutions stack by main OS
Apple Microsoft iOS Google Windows Android Phone
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•CPU, Memory, Display, Sensors Hardware components
•Design Device
•APIs Operating System •User Interface
•Maps / payment / voice commands
Services •App Store
•Apps Content
"Closed" ecosystem: Apple iOS
Apple designs its own devices working closely with suppliers of hardware components (such as Samsung and Sharp). It retains full control over the design of the device, the operating system and most of the services (Apple maps, Apple pay, App Store).
The key to its continuous success has been its ability to attract third party app developers to its platform and ensure that high quality content is available to its users.
Indirect network effects – the growth engine of mobile ecosystems
Successful ecosystems have managed to attract a large number of users and application developers. Each group benefits from the presence and growth of the other. Users benefit from a growing choice of applications and developers benefit from a growing number of potential customers. These “indirect network effects” make a mobile ecosystem viable when it has managed to attract both a significant number of users and a significant supply of applications. Apple and Google, the operators of the two largest ecosystems initiated this positive feedback loop by offering the first devices with a limited number of influential applications, which, taken together, were enough to attract a significant number of users. These influential applications included a store for purchasing media (especially music), iTunes or Google Play, a web browser, a map application, and games. Along with significant design improvements over competing mobile phones, and the convenience of combining a phone and a music player in one device, the supply of these first “killer apps” sparked an expansion in demand for smartphones with operating systems that could run third- party applications. The presence in the mobile ecosystem of a large base of smartphone users interested in purchasing more applications attracted a growing number of developers who were willing to respond to that demand. In addition, the growing user base attracted advertisers, who provide application developers an additional monetization model (in addition to pay-per-download and in-app purchases).
The sponsors of the mobile ecosystems make substantial investments to maintain the positive feedback loop between available applications, users and advertisers. Both Google and Apple attempyt to reduce the barriers to entry for developers of mobile applications by offering software development kits ("SDKs") which significantly reduce the time and effort required to develop an app. SDKs A significant factor attracting developers to both the iOS and the Android platform was the availability of an advanced Software Development Kit which made the development of apps significantly easier
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compared with older platforms. When Apple launched the SDK for the application developers to use, it also provided the support infrastructure needed for easy application development - like support forums and user interface guides to help the application developers create great looking, high quality applications easily.
All main mobile ecosystems (iOS, Android and Windows Phone) offer developers an easy way to monetize their applications. The applications stores running on iOS, Android and Windows Phone facilitate payments and transactions, collect feedback from users and reduce the search costs for consumers. Along with launching SDKs for developers, Apple, Google and Microsoft set up online mobile application stores, virtual marketplaces where the users could buy applications and content. They also provided a monetization framework for the developers to charge the users for their applications, thus creating revenue potential for the developers.
Here: Box about app stores iOS, Android, Windows Phone (fees charged, general rules) Google: 30% of the application price and any in-app purchases147, Apple: 30% of the application price and any in-app purchases.
Operators of mobile ecosystems excercice a varying degree of control over the apps and content sold through their application stores. They all require applications to be subject to a vetting process In general, a higher degree of control over the app store allowed for a higher degree of control over the quality of the applications that the users can download and run on their devices.
The availability of SDKs and an easy channel to sell applications helps to motivate individual third- party application developers to create applications for iOS, Android and Windows Phone. The number of applications available in the ecosystem is a decisive factor in the choice of consumers to buy devices running one of those operating systems increasing the monetization potential for the developers and creating a virtuous cycle and indirect network effects that made the number of applications available on these platforms grow.
5.3 Market dynamics
[Direct network effects – iCloud, messaging apps]
Mobile ecosystems are also characterized by direct network effects among users.
Switching costs
Apple
Economies of scale
Economies of scale
The applications were not limited to just games and productivity tools, but seeing the increasing reach of mobile phones, the developers started developing a wide variety of services like cloud storage, location based services like local deals, local information and navigation on top of the iOS platform. This growing application ecosystem remains critical for the evolution of the software platform. As the application ecosystem grows to include applications that appeal to niche users, the platform itself
147 https://support.google.com/googleplay/android-developer/answer/112622?hl=en
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becomes more valuable as it now appeals to a wider audience than it would have without these applications. The best-selling applications also help the platform leaders identify the functionality that the users want most. Not to mention that it is impossible for any organization to match the cumulative development resources and creativity of the developers that form the application ecosystem of a smartphone OS.
"Open" ecosystems – Android and Windows Phone
The Android ecosystem is a multi-sided platform bringing together device manufacturers, mobile networks, application developers and users.
Google officially entered the smartphone market as a relative latecomer, a year after Apple. The first commercially available smartphone running Android was the HTC Dream, released on October 22, 2008. In just a few years Google was able to bring together multiple mobile device vendors against Apple to create a very profitable ecosystem.
Android as an open source OS
Android is officially an open source project managed by the Open Handset Alliance (OHA) that is responsible for releasing and maintaining Android OS. It also oversees the evelopment of core Android open-source platform, strikes the necessary business deals and works to create development and user communities, acting as a base for this ecosystem. (But Google exercises control through other means – expand)
The strategy of open source software and device manufacturer's ability to use it without royalty payment was enticing. This led to hardware manufacturers flocking to Android, launching multiple devices in the Android ecosystem. Google's main strategy was to sell search and collect data on these mobile devices. Since its launch in October 2008 Google became the single largest deployed OS on the smartphones worldwide.
Wide adoption of Android gives Google data to enhance and improve its search and advertisement framework - the main sources of Google's revenues.
Android's appeal to Original Equipment Manufacturers (OEMs)
Google’s Android allowed new handset vendors such as Xiaomi, ZTE, Huawei, Acer or Lenovo (mainly Chinese) to enter the market by relying on Google’s and Android’s brand image to sell their products.
[Need more info] Google's partnership with Samsung – most successful Android vendor.
At the same time, it allowed the manufacturers to differentiate themselves by customizing the Android operating system. The open source nature of Android allowed the creation of "forks" – customized versions of the operating system which included a slightly different user interface or features. Some of
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the most popular "forks" include Fire OS (developed for its own devices by Amazon), Cyanogen OS or Cyanogen Mod.
Android's fragmented strategy seems to be working for the handset manufactures. Business Insider reported HTC's gross profit almost tripled in the year 2010, after it collaborated with Google for the launch of Nexus One (Yarow & Angelova, The Android Effect On HTC, 2011). Android gives unknown mobile device manufacturers instant credibility and market access. On the flip side, Android is reducing handset manufactures to commodity and has the same effect as Windows had on PC manufacturers. This is a direct quote - Need redrafting
When Android was first launched, there wasn't a clear dominant design in the market and the device manufacturers were innovating with different form factors and hardware capabilities. Consequently, the device manufacturers worked closely with component manufacturers along with Google in order to make devices with the best performance. But now, as a dominant design emerged, the hardware components have become standardized allowing the interface between the device and the components to be standardized and modularized, no longer needing the device manufacturers and component manufacturers to work in an integrated fashion.
Patents and intellectual property (probably not here)
• Tools to defend the ecosystems and discipline ecosystem participants
• Apple – very active in courts – battle for hardware and software • Google – uses copyright to control the Android ecosystem
• SEPs cases
App developers and app stores
Applications are a key element of the mobile ecosystem solutions stack.
In terms of the applications and services, Google provides an SDK, an application store and supporting infrastructure needed to make developing applications and services easy for the developers. However, unlike Apple, it does not mandate the use of its application store to buy and sell Android applications. As a result, there are several 3rd party application stores that have been created to sell Android applications including the one from Amazon, Opera and Samsung.
Challenges of openness: fragmentation
As Google released new software updates, the combination of customizations by OEMs and slower adoption of new OS versions by them caused inconsistent user interface experiences for consumers, as well as issues to developers who had to support various flavors. Developing apps for multiple flavors of Android OS, especially when OEM vendors are dragging their feet on updating to the latest versions, is a big challenge for developers (Tech Crunch, 2010a).
To address the growing concerns among the developer community related to Android fragmentation issues, in recent months, Google started holding back on the early software releases to only preferred
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partners. It has been forcing these partners to sign "non-fragmentation clauses," requiring them to get approval from Google for any customization of the OS. Google has become a lot more discriminating in favor of manufacturers who run Google services on their devices (Bloomberg Bussinessweek, 2011).
In order to keep the integrity of the OS and so that it does not get fragmented into separate OS versions for each device manufacturer, the device manufacturers work closely with Android engineering as they integrate the OS on their hardware platform.
Google's Google Play Services strategy – appealing to the developers
Windows Phone ecosystem – brief history of Nokia and Symbian XXXXX
5.4 Vertical integration of mobile ecosystem operators: app stores App store with a single channel of distribution has hugely simplified distribution issues previously faced by developers by reducing the overhead of managing payment, marketing, etc. One of the main reasons for app developer's adoption of iPhone and Android platforms is the emergence of these very app stores. As discussed earlier, there are many concerns among developers with the fragmentation in the Android marketplace. Everyone in the mobile ecosystem wants his or her own app store.
Following advantages of app store can help explain the rush by OS vendors (Google, Microsoft, Java), OEMs (Apple, Nokia, RIM, Motorola, Intel, Dell), carriers (Verizon, China Mobile, Airtel, Aircel), Independents (Appitalism, Amazon) to create their own app store. Gateway to app discovery process creates a competitive advantage. Amazon is trying to play into this space by providing an Android app store for Android OS, an equivalent to Apple's app Store for iOS. On March 22nd 2011 Amazon launched the Android app Store (Kincaid, J., 2011a).
A major reason for app stores being so popular is because they have greatly reduced the time-to-shelf and time-to-payment. Time-to-shelf means the time taken for an app to be available to download from the time the application was submitted. Time to payment means the time taken from when the consumer makes payment to the time it reaches its developer (Amazon Appstore). Without app stores, this process was terribly slow and too complicated for small app developers. As the report from Mobile Developer Economics 2010 suggests, time to shelf came down from 68 days to 22 days, on an average. In terms of time-to-shelf, according to app developers it is 24 days for iOS, a week for Android and 58 days for Symbian (this is another reason why Symbian is losing its market share so quickly).
Number of apps measures success of a platform, which in turn is directly proportional to the app developer eco-system a platform was able to attract. In an attempt to increase the stickiness with the platform, and create a barrier to entry for other platforms, Apple did not support cross-platform technologies such as Flash, initially for a couple of years, and it paid off well. Since adopting a new platform requires a steep learning curve (except for Android, as it was based on the Java platform, which had a huge installed base of developers), Apple created a high switching cost for developers. On September 9th 2010, Apple lifted its ban on Flash development for the iPhone (Sorrel, 2010)' but having developed deep expertise on iOS platform for so many years, the developers weren't really very enthusiastic about this announcement.
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Source: MIT, Emerging Trends in Mobile OS Platforms, Irfan Mohhamed
App store Apple tightly bundles the services of the App Store as a distribution and app-discovery market with the technical products that make up its platform. This is consistent with Apple's overall plan of providing a controlled "stack"of components and services
What is a mobile app?
Statistics on sales of apps
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Google Play and the Apple App store are the two main platforms for App distribution worldwide. In 2013 they accounted together for three quarters of worldwide App downloads and about 90% of revenue from App purchases (App downloads plus In-App purchases).
Concerning App downloads, Google Play is in the lead with 38bn downloads in 2013 versus 28bn for the Apple App Store. In terms of revenue, Apple's App Store generated over EUR 7bn in 2013, almost the double of the EUR 3.8bn generated by Google Play. Both platforms are in rapid expansion, whether measured in terms of App downloads or in revenues therefrom. The Apple App Store grew 45% in terms of downloads and 75% in terms of revenues in 2013. Google Play nearly doubled in number of downloads and saw a near 4-fold increase in revenue.
Looking at the breakdown of revenue from the Apple App Store in Europe reveals preferred business models and types of content. In-App purchases are the preferred App business model, over Pay per Download. In-App purchases account for close to 90% of App Store revenues in Europe in 2013. The revenue from In-App purchases was over EUR 1.4bn in Europe, versus less than EUR 200m from App paid downloads.
Games generate the largest share of App revenues, more so than all other Applications together. Games account for over 70% of App Store revenues in Europe in 2013. The revenue from Games reached about EUR1.2bn in Europe, whereas other Applications generated only over EUR 400m.
Source: European Commission, Digital Agenda Scoreboard, 2014
Statistics on developers [need more information and redrafting]
Apple
At the premium end of the market, Apple is growing their share of device sales. One of the strongest markets for local Android content, China, is Apple’s second largest market. Samsung is the main contender in premium Android but Apple finally made the jump to larger screens and removed the Korean giant’s largest differentiator. The iOS ecosystem appears to have a lock on the high end that will be hard to break. Slow but steady, iOS developer mindshare declines over recent years have reversed; they’re now back up to 54%. iOS also remains the primary platform for 37% of the full-time professional developers, creating the quality apps that keep their ecosystem in front. In North America and Europe,
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iOS commands a greater mindshare (58%) and by far the largest share of professional developers, with 42% prioritising the platform.
Android
In the rest of the market, Android will continue to dominate to the point where everyone and their dog owns a smartphone. At the same time, more premium handset makers like Samsung are struggling with competition from local manufacturers. Companies such as Xiaomi and Lenovo in China as well as Micromax in India, are offering better value with the same app ecosystem in the mid-to-low range device segment. This fierce competition helps Android to reach lower price points and thus a wider audience. It’s great for users. At the same time inability for manufacturers to differentiate significantly from one another prevents them from competing in the premium market. Even without much of the high-end, Android represents such an enormous global market that it retains 70% developer mindshare and the priority of 40% of full-time professional developers. Outside North America and Western Europe, almost half (48%) of full-time professionals are prioritising the platform and almost three quarters (74%) target it.
Source: Developer Economics | State of the Developer Nation Q1 2015 | VisionMobile
What is an app store? • Two sided transactional platform • App stores are governed by rules – eg. Google Play Developer Distribution Agreement
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One of the major strengths of the mobile app delivery model is that by having a centralised market or distribution centre you can assert policy and control mechanisms on it. For instance, an app store owner can develop rules for how apps are written and then delivered to the central store. They can also scan uploaded apps to ensure that they are efficient and free of any malicious code. By allowing a user to install an app from any source you break this model and as a result greatly increase security risk.
But: http://gigaom.com/2014/06/17/google-faces-new-competition-complaint-in-europe-this-time-over- android-app-stores/ • Advantages of centralised marketplaces – lower search costs (recommendation engines), aggregate user feedback • Facilitate transactions – address payments and trust • Minimum requirements for apps – no pornography / spying etc
Main app stores
Native app stores
• App Store
• Google Play
• Windows Phone
• Blackberry
Non-native app stores
• Amazon Appstore
• Yandex.Store
• Aptoid
• Cydia
Downloading apps from non-native app stores
Sideloading mobile apps is defined as when a user can install a mobile app without using the official platform app store or app market. The ability to install mobile apps from outside of the ‘official’ platform app stores is only officially supported on one Smartphone operating system, Google’s Android. It can be achieved through ‘unofficial’ means on other devices when a user decides to Jailbreak their device. For instance, Jailbreaking an iOS device and allowing a user to install mobile apps from other sources outside of Apples official app store, e.g. through Jailbreak app stores such as Cydia. As we have seen Jailbreaking breaks the official iOS security model and creates increased levels of risk for the user, including the risk of being infected by malware.
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Electronic commerce retailers such as Amazon are reliant on sideloading support to allow its Android-powered Kindle smart devices to download apps from Amazon’s own curated app store.
5.5 Impact of the emergence of mobile ecosystems and the App Economy
Jobs Type of jobs, revenue per developer
A study by Gigaom for the European CommissionError! Bookmark not defined. found that in 2013 EU developers took in €17,5 billion in revenue and it was forecasted to increase to €63 billion in 2018. In addition to €6 billion from in app sales, in-app spending for virtual goods and advertising, EU developers recognized €11.5 billion in 2013 from contract labour. The study estimated that the EU app-developer workforce would grow from 1 million in 2013 to 2,8 million in 2018 with additional support and marketing staff resulting in total app economy jobs of 1,8 million in 2013, growing to 4,8 million in 2018. By comparison, the European film industry employs over 373 000 people, and reached revenues of some €60 billion in 2011.
Smartphone platforms and users
Various benefits thanks to new services
Smartphone platforms and innovation
There are more features and services becoming available to the users over time, which can be explained by the ease with which anyone can create and publish applications and services on the OS platforms as well as large application developer ecosystem that has risen around the software platforms.
As the number of software services and applications has grown, the smartphone OS has become a critical piece as it forms the basis for the availability of services and applications for the users as well as the basis of a rich ecosystem of partners that provided pieces of the solution stack.
Operating systems facilitate the integration of different building blocs
Multi-homing: Cost of developing an app for multiple platforms
The impact of all of this recombination and new invention was threefold.
Smartphones are general purpose technology (GPT). Their manufcaturers can't foresee all the uses to which they will be put.
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First, an application developer can create a new mobile app spending only a tiny fraction of the overall R&D cost of providing it. Much of the R&D cost, including invention of mobile devices, invention of mobile telephony transmission, invention of the commercialized internet, of the cloud, etc., has already been born and is spread over thousands of applications. So, too, has much of the investment cost in infrastructure, such as putting mobile phone cells in place. None of these common R&D or infrastructure investment costs are marginal to a particular app. For mobile applications developers, the fixed costs of offering a working system to users have been dramatically lowered. Second, to the extent applications developers took up this challenge, the economic return to new invention and investment in the platforms and in the pre-existing complementary technologies which were recombined would be raised. Third, the opportunities for applications developers were left largely up to them to discover.
Smartphone platforms and the EU App Economy - benefits for European start-ups
5.6 Key characteristics of mobile ecosystems
- high market concentration,
- high indirect network effects,
- high economies of scale,
- vertical integration of most ecosystems,
- data collection,
- high number of small app developers,
- platform for other services (apps) through APIs
5.7 Key issues
- potential dominance,
- access to APIs and app stores,
- privacy,
- discrimination in favour of own services,
- commercial data collection
Longevity of multi-platform and multi-ecosystem dominance
App stores separate market given loyalty of hardware users?
App stores limiting use of proprietary data by non-vertically integrated online platforms (via T&C)
Bundling of apps and services by platform sponsors
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Entry by platform sponsors into the downstream market for complementary goods – either because they are profitable or to stave off competition.
Structure of app discovery algorithms in the app stores – transparency?
6. Payment systems
Electronic payment systems are typical examples of two-sided markets where payment service providers match two distinctive groups of users: merchants who pay various fees for the payment service and customers who normally get the service for free. In the current state of market development, following sub-segments can be distinguished based on the underlying payment instrument: 1) Credit and debit card schemes with main market players being VISA and MasterCard [four party schemes], Amex, Diners Club, Discover [three party schemes]
2) Electronic money accounts ("wallets") such as Paypal, which integrate various payment instruments [credit, debit, cards, online bank accounts] in one single online account
3) So called "third party service providers" which match online bank account with merchants' website and allow consumers to pay online via their bank account. The most known examples include: Sofort [Germany], IDEAL [Netherlands], Klarna [Sweden]
4) "Blockchain" type of platforms which exchange virtual currencies and are being experimentally used in e-commerce.
6.1 General description of the business model:
CARDS In general there are two main business models according to which card payments operate: three party and four party schemes. Three party schemes operate through an independent party (the scheme proprietor) who issues cards to consumers and offers acquiring services to merchants directly. Four party schemes are slightly more complex and offer their services (network use) to financial institutions (often banks) that in turn operate as issuers (serving cardholders) or acquirers (serving merchants). These financial institutions use the scheme’s payment processing system to facilitate transactions between the cardholders and merchants. The scheme itself does not issue any cards, nor does it extend credit, set interest rates or merchant fees. Their primary source of income is gained through fees paid by their clients based on the volume of payments.148
For four-party card schemes, the revenue stream looks as follows149:
148 Joseph Dale Mathis, European Competition Law and Multilateral Interchange Fees International and European Law, Track of European Union Law, University of Amsterdam 149 http://europa.eu/rapid/press-release_IP-15-4585_en.htm
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The system of interchange fees [MIF's] has been found nontransparent and ultimately anticompetitive in a number of DG COMP's investigations, which led to adoption of regulation which puts in place caps as on these fees [regulation 2013/0265].
Electronic money accounts – example Paypal Electronic payment accounts, such as PayPal provide a secure wallet system of transferring funds for both senders and receivers. Both must open an account with PayPal and provide details of a credit, debit or bank account, which is drawn on if insufficient funds remain in the PayPal wallet ('float') to honour a transaction. Access to the account is through email address and password.150
150 http://www.ecommerce-digest.com/paypal-case-study.html
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Third party service providers (TPP's) – example SOFORT SOFORT is an online direct payment method and works on the basis of online banking. Contrary to the online wallet, the customer does not need to register or open a virtual account. The transfer of funds is immediate. The online merchant receives confirmation of the transfer order in real time and can dispatch the goods promptly. There is no waiting time before the goods are sent, as is the case with payments in advance (by means of a bank transfer). The revenue stream is similar to the models described above. A transaction fee is deduced from the merchant, while the consumer doesn’t pay for the payment service.
This business model relies on access to consumer's bank account by the TPP, granting of which used to rely entirely on the willingness of the bank. This aspect has been regulated in the Payment Services Directive II which gives consumer the right to use third party payment services, by which it effectively forces the banks to open this access to bank accounts. Rules on liability, security of transactions and the use of data are envisaged. PSD also applies to card and e-money payments.
Blockchain A blockchain is a public ledger of all Bitcoin (virtual currency) transactions that have ever been executed. It is constantly growing as ‘completed’ blocks are added to it with a new set of recordings. The blocks are added to the blockchain in a linear, chronological order. Each node (computer connected to the Bitcoin network using a client that performs the task of validating
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and relaying transactions) gets a copy of the blockchain, which gets downloaded automatically upon joining the Bitcoin network. 151
______
Platforms - template
6.1 Description of the main players • Which are the main platforms? When were they created? • What is their valuation / revenue? • Which other types of companies are in competition with these platforms?
6.2 General description of the business model • Who are the users? • What services does the platform deliver to all groups of users? • How does the platform make money?
6.3 Description of market dynamics • Is the market concentrated / fragmented – what are the market shares? • What are the factors leading to high / low concentration (network effects, lock-in, economies of scale?) • Is entry likely to be difficult for newcomers (what are the main barriers)? • What might the market look like in the future (are these platforms expanding into new areas?)
6.4 What is the impact of this / these platform(s)? • On consumers (how many in EU, what do they gain?) • For suppliers (how many in EU, what do they gain / lose?) • Impact on innovation • General effect on the economy: jobs, growth • Impact in other areas (politics, environment, equality…)
6.5. Key characteristics relevant for policy • in the literature? • in the public consultation? • raised by experts in workshops / roundtables?
151 http://www.investopedia.com/terms/b/blockchain.asp#ixzz3py0kDTNI
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6.6 Key issues
- security
- collection and use of data
7. Collaborative economy
7.1 What are collaborative economy platforms? This question could also be phrased to read 'what is the collaborative economy?', given that the rise of online platforms has effectively allowed the existing concept of the sharing of assets and services to find a widespread 'real-world' application. Indeed, by creating large online 'communities' of individuals or businesses wishing to exchange goods and/or services, 'regulated' by the crucial peer review-system, online platforms have been able to inspire trust in their users, thus unlocking a revolutionary efficiency gain; limiting the number of assets and workers sitting idle. Some 'traditional' stakeholders are concerned that this increased efficiency could constitute a two-edged sword, as gains for society (lesser overall environmental impact) and individual users of collaborative economy platforms (increased employment, decreased expenditure) may de facto limit overall economic output and limit social welfare. However, certain online platforms active within the collaborative economy have pointed to the fact that, for example, a significant percentage of collaborative economy 'providers' (e.g. individuals offering services) engage in these activities in addition to their existing jobs, or were previously unemployed, thus adding to employment levels. Certain studies also project very significant revenue growth for (certain sectors of) the collaborative economy going forward,152 with nearly one in three Europeans indicating that they will take part in the collaborative economy in the next year153. In fact, the potential economic gain to be derived from the development of the collaborative economy has been estimated to amount to EUR 572 billion, although existing barriers could reduce the value of potential increased use of assets by as much as EUR 134 billion (in the medium to long term).154 Finally, it should be noted that the EU is home to a number of successful collaborative economy platforms, which themselves also significantly (and increasingly) add to economic output and innovation.
The Commission indeed recognises the significant benefits brought by collaborative economy business models (for example for innovation, employment and consumer welfare) and has therefore, as part of its Single Market Strategy, announced the publication of a European Agenda for the Collaborative Economy.155 This initiative will involve the issuing (in 2016) of guidance on the
152 See, in this regard, for example: PriceWaterhouseCoopers' Consumer Intelligence Series, The sharing economy – sizing the revenue opportunity, available at: http://www.pwc.co.uk/issues/megatrends/collisions/sharingeconomy/the-sharing-economy-sizing-the- revenue-opportunity.html [accessed at February 2016]. 153 See ING International Survey, 'What's mine is yours – for a price. Rapid growth tipped for the sharing economy,', available at: http://www.ing.com/Newsroom/All-news/European-sharing-economy-to-grow- by-a-third-in-the-next-12-months.htm [accessed at February 2016]. 154 See: European Parliamentary Research Service study, 'The Cost of Non-Europe in the Sharing Economy' of January 2016, p. 21, available at: http://www.europarl.europa.eu/RegData/etudes/STUD/2016/558777/EPRS_STU(2016)558777_EN.pdf [accessed at February 2016]. 155 https://ec.europa.eu/transparency/regdoc/rep/1/2015/EN/1-2015-550-EN-F1-1.PDF [accessed at February 2016].
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application of existing EU law (Services Directive, E-commerce Directive, European consumer protection acquis and relevant Treaty provisions) to collaborative economy business models, in order to enhance the development of the collaborative economy by increasing legal certainty [to be checked whether already published].
McKinsey estimated that the emergence of new digital platforms will add 2.5% to European employment numbers by 2025, with some countries such as Spain seeing growth twice as high. This could be partly the effect of collaborative platforms bringing transparency to work previously done in the “grey economy”. The overall effect is greater participation in the workforce, a factor that could lift the GDP of the UK and Germany by nearly two percentage points over the next decades156.
An example of a particularly valuable deployment of digital technology within the collaborative economy is the EU-funded 'Give and Take'-project, which is developing an online platform to allow senior citizens to exchange services and resources, empowering volunteers and enhancing existing care-taking levels.157
7.2 Main players in the EEA Existing collaborative economy platforms already cover a wide range of activities, including the provision of: accommodation, transport services, labour & professional services ('tasks' or 'gigs'), and crowdfunding & peer-to-peer lending facilities.
Within the EEA, important players are ride-sharing platform BlaBlaCar (25 million members worldwide158, founded in France and covering many EU Member States), the accommodation platform Airbnb (over 60 million guests worldwide159, present in most EU Member States), the crowd-funding platform Kickstarter (over USD 2 billion pledged to its worldwide projects160, open to creators from more than 10 EU Member States), the peer-to-peer lending platform Zopa (which expected to intermediate in loans totalling GBP 400 million in 2014161, founded in the UK), and the consumer appliance sharing platform Peerby (founded in the Netherlands162).
Peer-to-peer (P2P) lending seems to be a particularly important sector of the collaborative economy for certain EU Member States, with a country like Estonia having recently seen the launch of a plethora of online P2P lending platforms (including Bondora163, Omaraha164, estateguru165,
156 A Labor Market that works: Connecting talent with opportunity in the Digital age, McKinsey Global Institute, June 2015. 157 For more information, see: http://givetake.eu/about_2015/ [accessed at February 2016]. 158 See BlaBlaCar's corporate website: https://www.blablacar.co.uk/blog/blablacar-about [accessed at February 2016]. 159 See Airbnb's corporate website: https://www.airbnb.com/about/about-us [accessed at February 2016]. 160 See Kickstarter's corporate website: https://www.kickstarter.com/help/stats?ref=about_subnav [accessed at February 2016]. 161 See: http://www.theguardian.com/business/2013/aug/12/zopa-business-lender-online-broker [accessed at February 2016]. 162 See Peerby's corporate website: https://www.peerby.com/contact [accessed at February 2016]. 163 https://www.bondora.ee/en/about-us [accessed at February 2016]. 164 https://omaraha.ee/et/ [accessed at February 2016]. 165 https://estateguru.eu/ [accessed at February 2016].
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fundwise166, Investly167, MoneyZen168 and Crowdestate169). Similarly, Sweden, Poland and Latvia are each also home to a number of online platforms operating P2P lending facilities (including Lendify170 and Mintos171).
7.3 Business models Online platforms that intermediate in the collaborative economy tend to charge their users on both sides of the platform a commission on completed 'transactions'.
P2P lending platform Zopa was for example reported to charge lenders 1% of their loans and by requiring a fee from borrowers.172 Kickstarter, in turn, charges 5% of each successfully funded project.173 BlaBlaCar charges its users with a fixed fee combined with a percentage of the cost contribution per seat (which can also be zero).174 Finally, Airbnb charges both hosts and guests a certain percentage of the applicable accommodation fees.175
An important distinguishing factor between the various types of business models however does exist, which is the control that the online platforms have over price-setting.
This difference becomes apparent when comparing the business models of Uber and BlaBlaCar; whereas both charge their users with an intermediation fee, Uber (its dynamic pricing algorithm) in addition determines the level of the overall price of the 'ride'176, whereas in the case of BlaBlaCar this is done by its drivers (which can also decide not to charge any 'cost contributions')177. BlaBlaCar furthermore tries to prevent drivers from using its system to provide profitable transportation services, and therefore recommends an upper bound 'price' that would reflect the costs of the ride.
7.4 Market structure
The success of collaborative economy platforms may attract a number of similar online players to the new markets that they develop, as can be seen in Estonia in the P2P lending segment. Importantly, within a true 'collaborative' economy, it is exclusively the online platforms that act as profit-making business-to-consumer (B2C) service providers. Their users rather engage in 'exchanges' within certain 'peer-groups' (either businesses or consumers). In practice, the concept of sharing is however somewhat more nuanced, as home owners that for example 'share' their properties on Airbnb will generally do so in return for remuneration, which can even be rather high in sought-after markets.
166 https://fundwise.me/ [accessed at February 2016]. 167 https://investly.co/en/home/ [accessed at February 2016]. 168 https://www.moneyzen.eu/ [accessed at February 2016]. 169 https://crowdestate.eu/#/about [accessed at February 2016]. 170 http://www.lendify.com/ [accessed at February 2016]. 171 https://www.mintos.com/en/about-us/about-us/ [accessed at February 2016]. 172 See: http://www.theguardian.com/business/2013/aug/12/zopa-business-lender-online-broker [accessed at February 2016]. 173 See Kickstarter's Terms of Use: https://www.kickstarter.com/terms-of-use [accessed at February 2016]. 174 See BlaBlaCar's Terms and Conditions: https://www.blablacar.co.uk/blog/terms-and-conditions [accessed at February 2016]. 175 See Airbnb's Terms of Service: https://www.airbnb.com/terms [accessed at February 2016]. 176 See Uber's Terms of Service: https://www.uber.com/legal/bel/terms [accessed at February 2016]. 177 See BlaBlaCar's Terms and Conditions.
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The unconventional nature of the relationship between providers and users in the collaborative economy (peer relationships) means that it is not clear to what extent traditional regulatory frameworks such as, for example, the EU's consumer protection acquis applies. This means that trust is a key element to the success of the collaborative economy, which online platforms can (to an extent) provide by way of rating and review mechanisms. The richness of user profiles is therefore a particularly important competitive parameter for online platforms operating within the collaborative economy. The importance of review mechanisms was also recognised by a significant majority of consumers that responded to the Commission's public consultation on online platforms.
7.5 Impact of collaborative economy platforms
As already indicated, collaborative economy platforms have been the driving force behind the rapid rise of the collaborative economy. They have also transformed a somewhat marginal phenomenon into something that is capable of challenging existing market structures, as citizens substitute their consumption of certain goods and services with the sharing thereof. Although the overall impact of the collaborative economy in Europe remains somewhat limited, it is forecasted to grow significantly going forward.
When online collaborative economy platforms however catch on, they can indeed have a major impact on society as they create entirely new markets and disrupt existing ones. This may lead regulators to struggle with how to effectively adapt or enforce existing regulation vis-à-vis collaborative economy providers, users as well as online collaborative economy platforms. Airbnb has for example already been used by over five million visitors from all over the world to visit Spain alone. The regional Catalan authorities therefore recently announced that they would embrace the new forms of accommodation provision by designing a regulatory framework that accommodates regular home-sharing.178 Similarly, the municipality of Amsterdam seems to have embraced the opportunities offered by this new technology by putting rules in place that allow Airbnb to collect city taxes on its behalf.179
7.6 Key characteristics relevant for policy
Key characteristics of online collaborative economy platforms are: (i) the key importance of user/peer review systems; (ii) strong network effects; (iii)
7.7 Key issues
Accountability
Certain or most online collaborative economy platforms claim that they are not only excluded from liability for illegal third-party content that they host on their website (under the liability exemption of the E-commerce Directive), but also for contractual or public obligations that may derive from the provision of the physical service in which they intermediate. To substantiate this claim, these
178 https://www.airbnbaction.com/catalonia-working-on-plans-to-regulate-sharing-economy/ [accessed at March 2016]. 179 https://www.airbnb.be/press/news/amsterdam-and-airbnb-sign-agreement-on-home-sharing-and- tourist-tax [accessed at March 2016].
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platforms explain that they are mere intermediaries that are not in any way a party to the contracts that providers and users of their platform enter into.
Major players such as Kickstarter (the crowdsourcing platform), BlaBlaCar and Airbnb indeed all feature blanket exclusions from liability in their terms of service:
• "Kickstarter isn’t liable for any damages or losses related to your use of the Services. We don’t become involved in disputes between users, or between users and any third party relating to the use of the Services. We don’t oversee the performance or punctuality of projects, and we don’t endorse any content users submit to the Site. When you use the Services, you release Kickstarter from claims, damages, and demands of every kind — known or unknown, suspected or unsuspected, disclosed or undisclosed — arising out of or in any way related to such disputes and the Services. All content you access through the Services is at your own risk. You’re solely responsible for any resulting damage or loss to any party." (Kickstarter Terms of Use).180 • "BlaBlaCar will not be liable to any User in the event that any information provided by a User (including for the avoidance of doubt another User) which is incomplete, inaccurate, misleading or fraudulent. (…) BlaBlaCar is not a party to any agreement or transaction between Users, nor is BlaBlaCar liable in respect of any matter arising which relates to a booking between Users." (BlaBlaCar Terms and Conditions).181 • "YOU ACKNOWLEDGE AND AGREE THAT, TO THE MAXIMUM EXTENT PERMITTED BY LAW, THE ENTIRE RISK ARISING OUT OF YOUR ACCESS TO AND USE OF THE SITE, APPLICATION, SERVICES AND COLLECTIVE CONTENT, YOUR LISTING OR BOOKING OF ANY ACCOMMODATIONS VIA THE SITE, APPLICATION AND SERVICES, YOUR PARTICIPATION IN THE REFERRAL PROGRAM, AND ANY CONTACT YOU HAVE WITH OTHER USERS OF AIRBNB WHETHER IN PERSON OR ONLINE REMAINS WITH YOU. NEITHER AIRBNB NOR ANY OTHER PARTY INVOLVED IN CREATING, PRODUCING, OR DELIVERING THE SITE, APPLICATION, SERVICES, COLLECTIVE CONTENT OR THE REFERRAL PROGRAM WILL BE LIABLE FOR ANY INCIDENTAL, SPECIAL, EXEMPLARY OR CONSEQUENTIAL DAMAGES, INCLUDING LOST PROFITS, LOSS OF DATA OR LOSS OF GOODWILL, SERVICE INTERRUPTION, COMPUTER DAMAGE OR SYSTEM FAILURE OR THE COST OF SUBSTITUTE PRODUCTS OR SERVICES, OR FOR ANY DAMAGES FOR PERSONAL OR BODILY INJURY OR EMOTIONAL DISTRESS ARISING OUT OF OR IN CONNECTION WITH THESE TERMS, FROM THE USE OF OR INABILITY TO USE THE SITE, APPLICATION, SERVICES OR COLLECTIVE CONTENT, FROM ANY COMMUNICATIONS, INTERACTIONS OR MEETINGS WITH OTHER USERS OF THE SITE, APPLICATION, OR SERVICES OR OTHER PERSONS WITH WHOM YOU COMMUNICATE OR INTERACT AS A RESULT OF YOUR USE OF THE SITE, APPLICATION, SERVICES, OR YOUR PARTICIPATION IN THE REFERRAL PROGRAM OR FROM YOUR LISTING OR BOOKING OF ANY ACCOMMODATION VIA THE SITE, APPLICATION AND SERVICES, WHETHER BASED ON WARRANTY, CONTRACT, TORT (INCLUDING NEGLIGENCE), PRODUCT LIABILITY OR ANY OTHER LEGAL THEORY, AND WHETHER OR NOT AIRBNB HAS BEEN INFORMED OF THE POSSIBILITY OF SUCH DAMAGE,
180 Available at: https://www.kickstarter.com/terms-of-use [accessed at February 2016]. 181 Available at: https://www.blablacar.co.uk/blog/terms-and-conditions [accessed at February 2016].
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EVEN IF A LIMITED REMEDY SET FORTH HEREIN IS FOUND TO HAVE FAILED OF ITS ESSENTIAL PURPOSE." (Airbnb Terms of Service).182
In the absence of liability of these platforms, a question is whether their users require some form of protection against possible misuse by their 'peer' providers. Also, if providers can explain that they are private individuals engaging in the exchanging of assets, whereas the online platform would not be involved at all in the provision of the underlying physical service, no liability for risk is awarded at all. This may lead 'traditional' operators of, for example, accommodation services or transport service to claim that they suffer from unfair competition from collaborative economy providers. Moreover, this may result in a situation where governments may not have any party to hold accountable for public obligations. This however does not mean that online platforms can't effectively cooperate with government, or that they don’t have public or civil obligations to respect. Airbnb has for example entered into an agreement with the City of Amsterdam whereby it commits itself to collect city tourist taxes from users of its online platform.183 It furthermore provides a so-called Host Guarantee, which protects hosts from certain types of damages to their property.184 Some also call upon governments to use online platforms to more effectively attain certain public policy objectives.185 However, such forms of cooperation remain voluntary for the moment and governments will in such cases have to trust that the online platform is providing the correct and complete information.
Regulatory level playing field
Reliability and portability of user reviews
Given the key importance of review mechanisms both for the business of the online platforms, as well as for the ability of providers to attract users, reliability and portability thereof appear to be issues particularly relevant in relation to the collaborative economy.
8. Creative content
A. Description of the main players
• What are creative content platforms?
182 Available at: https://www.airbnb.com/terms [accessed at February 2016]. 183 See: https://www.airbnb.nl/help/article/860/amsterdam [accessed at February 2016]. 184 See: https://www.airbnb.com/guarantee [accessed at February 2016]. 185 See: European Parliamentary Research Service study, 'The Cost of Non-Europe in the Sharing Economy' of January 2016, p. 28, available at: http://www.europarl.europa.eu/RegData/etudes/STUD/2016/558777/EPRS_STU(2016)558777_EN.pdf [accessed at February 2016].
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The opportunities created by rapid technological advances and the internet revolution have led to the establishment of diverse types of online service providers (OSPs). Numerous OSPs have developed business models allowing provision of or access to digital products which can be considered to constitute "digital content". Thus, different approaches to the topic of the content provider platforms are possible.
For example, the Commission's public consultation regarding Contract rules for online purchases of digital content and tangible goods draws attention to the wide range of digital products that could be viewed as "digital content". The consultation questionnaire enquires about digital content products which "may cover inter alia the products listed below: • games, including online games • media (music, film, sports, e-books) for download • media (music, film, sports) accessible through streaming • social media • storage services • on-line communication services (for example, Skype) • any other cloud services • applications and any other software that the user can store in its own device • any software that the user can access online • any other service that is provided solely online and result in content that the user can store in its own device (such as translation service, counselling) • any other service that is provided solely online"186
The Study for the IMCO Committee of the European Parliament of December 2015 entitled "Over-the- Top (OTT) players: Market dynamics and policy challenges"187 tackles the topic by employing the term CAP (content and application providers). The IMCO Study bases its approach on the consideration that over-the-top services represent applications or content or both. The IMCO Study provides the following simplified taxonomy of CAPs based on the functions that they serve:
A legal definition of digital content is contained in Art. 2 of the Consumer Rights Directive188: ‘digital content’ means data which are produced and supplied in digital form. Recital 19 of the Directive further
186 List from the Public consultation on Contract Rules for Online Purchases of Digital Content and Tangible Goods 187 http://www.europarl.europa.eu/RegData/etudes/STUD/2015/569979/IPOL_STU(2015)569979_EN.pdf 188 Citation of number of directive
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clarifies that "digital content" means "data which are produced and supplied in digital form, such as computer programs, applications, games, music, videos or texts, irrespective of whether they are accessed through downloading or streaming, from a tangible medium or through any other means."
This section of the present study adopts a narrower approach to the term "content" in order to deliver a focused and in-depth analysis specifically of platforms whose purpose is to allow access to the general public of digital creative content. The creative content platforms analysed below shall be distinguished based on the type of content which is published/broadcast via them. Platforms that allow for the publishing/broadcasting of the following four types of creative content shall be examined:
1) Audio Content
2) Audio-visual Content
3) Images
4) Literary Content
A taxonomy with some notable examples of platforms which act as creative content providers is shown below: to be inserted
For the purposes of this study189, creative content platforms shall be considered platforms which enable creative individuals and/or professional creators of content to provide access to their creations to the general public. On this basis, a distinction can be drawn between creative content platforms and on-line communication platforms (which allow for the sharing of creative content only among the communicating parties) as well as social media platforms (whereby the sharing of creative content takes place within a limited social circle).
Having said that, it is important to note that such platform categories are not often clear cut and some platforms may play more than one role or may to tend expand into new fields of activities. For example, YouTube acts as video-sharing platform of user-generated content but it also has social network aspects. Facebook is well-known for its social media and on-line communication features, but creative users are free to use their Facebook profiles to provide access to content to the general public, instead of a limited selection of friends. Even specialised creative content platforms, such as Adobe's "Bēhance", which targets creative professionals and aims to match B2B and B2C supply and demand for creative services, may have strong social media aspects.
• difficult to identify which aspect is leading for a specific platform; first – to establish the criteria for making such a finding (revenue generation, consumer interest, platform investment) and second - upon deciding on the most appropriate criteria, to find reliable data in order to quantify it; furthermore, such a finding may not be valid over time since the sector is extremely dynamic and services evolve over time. So does consumer interest. • In this context, is neither feasible nor necessary for the purposes of this report to make an exhaustive list of specific creative content platforms or an exhaustive description of their business models.
189 check if there is literature which uses also uses “creative content platforms” in the same sense, or an alternative term that is accepted?
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The present study will focus on several widely known platforms which have a strong creative content provider aspect. The analysis will aim to examine key characteristics of the different business models which are at the core of the impact of online platforms on creative content provision and on various stakeholders. It is to be noted that due to the dynamic nature of the sector, the descriptions provided herein are necessarily a snapshot of the landscape at a particular point in time.
• Which are the main platforms? When were they created? What is their valuation / revenue?
[platform examples that I am researching in order to give specific examples & get evidence for deriving general conclusions:
Video: Youtube, Dailymotion,Vimeo model compared to Netflix, Amazon Video, ITunes, Google Play Movies, Curiosity Stream (new entrant trying to differentiate itself by offering only non- fictional documentaries and TV Series), Hulu
Audio: Spotify, Apple Music, Deezer, SoundCould,
Visual: Flickr, Getty Images190, Adobe Behnce
Literary: Wikipedia, https://www.academia.edu/]
I. Video
In the field of video content, a vast array of OSPs use the internet in order to provide users with access to creative content. Such OSPs range from traditional linear television broadcasters which have embraced online opportunities to deliver their content191 to OSPs who act as hosts for video content uploaded on user’s initiative and allow access to it to viewers. All those types of OSPs act as intermediaries between content creators and content users. However, some of those OSPs act as “resellers” of content in the sense that prior to giving access to content, they acquire rights to it by negotiating a license with content holders. Then, they sell users access to the acquired content. Other OSPs choose to function as a video content host on which content creators upload content that is then available for searching and access by interested viewers. There are also OSPs who combine those business models (e.g. YouTube Red – paid version of Youtube, YouTube channels).
[Research of platforms in order to give specific examples & get evidence for deriving general conclusions:
YOUTUBE
190 Getty written submission to HoL: http://data.parliament.uk/writtenevidence/committeeevidence.svc/evidencedocument/eu-internal- market-subcommittee/online-platforms-and-the-eu-digital-single-market/written/23227.pdf 191 for example…HBO… BBC iPlayer
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• launched in 2005 • acquired by Google in 2006 for $1.65 billion • over 1 billion users (according to Youtube)192 • the number of users coming to YouTube who start at the YouTube homepage, similar to the way they might turn on their TV, is up more than 3 times y/y. (according to Youtube)193 • revenue model: o online advertising: generates revenues from content circulated by third individuals o in 2015, YouTube made a move into the subscription revenue model by offering subscribers in the USA ad-free paid membership 194195 • YouTube Partner Earnings196: sharing ad revenue with uploaders of popular videos that are attractive to advertisers • informational features including • informational features including o video recommendation o creation of playlists
NETFLIX
• US-based platform (headquartered in Los Gatos, California) • Established in 1997, website opened in 1997 offering DVD rentals as well as DVD sales by mail; started as a traditional traditional pay-per-rental model; later moved on to a monthly subscription model for DVD rentals (fixed fee for unlimited number of rentals) • online streaming of audiovisual content was first offered in 2007 • hybrid reseller mode: o own content o licensed content
192 https://www.youtube.com/yt/press/statistics.html ; does this mean daily unique visitors or sth else? check StatCounter 193 https://www.youtube.com/yt/press/statistics.html 194 https://support.google.com/youtube/answer/6305537?hl=en-GB&ref_topic=6305525; http://www.fastcompany.com/3038483/its-official-youtube-is-spotifys-newest-competitor 195 Today YouTube confirmed that any “partner” creator who earns a cut of ad revenue but doesn’t agree to sign its revenue share deal for its new YouTube Red $9.99 ad-free subscription will have their videos hidden from public view on both the ad-supported and ad-free tiers. http://techcrunch.com/2015/10/21/an-offer-creators-cant-refuse/#.flkdzi3:biPd ; ESPN had to remove its content from US Youtube because its other contracts prevented from g on subscription services http://techcrunch.com/2015/10/23/youtube-red-creators/ ; According to Chief Business Officer Robert Kyncl at today’s YouTube Red launch event, 99% of content consumed on YouTube will be still available, noting that the vast majority of creators signed the deal. But they didn’t have much choice, otherwise they’d lose out on both the previous ad revenue, the new subscription revenue, and the connection with fans. Kyncl says YouTube will pay out “the vast, vast majority of revenue” to creators, but he repeatedly refused to detail what that percentage would be. Subscriptions music service Spotify pays 70% and Apple Music pays 71.5%. Earlier this year, a change to YouTube Partner Program Terms said creators would be paid just 55% of revenue. That would be comparatively low. http://techcrunch.com/2015/10/21/an-offer- creators-cant-refuse/#.flkdzi3:biPd ; In theory, if YouTube presented an offer that made creators more money without a significant loss of control, they’d happily volunteer. But the coercion involved It sets an alarming precedent about how YouTube and Google might work with creators in the future. Being the defacto video platform of the Internet affords it enormous strength behind its threat of removing their content if they don’t play ball. So what’s to stop it from altering the deal any further? http://techcrunch.com/2015/10/21/an-offer-creators-cant-refuse/#.flkdzi3:biPd 196 https://support.google.com/youtube/answer/72902?hl=en ; http://www.investopedia.com/articles/personal-finance/032615/how-youtube-ad-revenue-works.asp
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• informational features including: o movie reviews o movie suggestions based on past views o movie information • revenue model: subscription only • about 70 million members worldwide in 2014197 • membership steadily growing with 3.62 million new members joining in the first 3 quarters of 2014198 • expansion in new markets: launch in Spain, Italy and Portugal in 2015; planned launch in Taiwan, South Korea, Singapore and Hong Kong in 2016 * "an EU-regulated audiovisual media service provider, which commissions programmes or buys them wholesale to create a retail service. If Netflix is an “online platform”, then so would be the BBC iPlayer or any online broadcaster or video-on-demand provider. Service providers like Netflix or Amazon exercise significant control over the characteristics of the products or services they make available to consumers – and have commensurate regulatory responsibilities."199
AMAZON VIDEO • started on on September 7, 2006, as Amazon Unbox • hybrid reseller model: o acquiring rights for content and selling access o distributing own content as well • revenue model for the sale and rental of movies/TV series o sale o monthly subscription (Amazon Prime) o pay per view rental o free with ads • download/streaming music service also offered
iTUNES
Hulu
Curiosity Stream • ad-free subscription video non-linear service • launched in March 2015, US-based (in Maryland)
Google Play Movies]
197 Netflix Letter to Shareholders dated 14 October 2015, http://files.shareholder.com/downloads/NFLX/861339127x0x854558/9B28F30F-BF2F-4C5D-AAFF- AA9AA8F4779D/FINAL_Q3_15_Letter_to_Shareholders_With_Tables_.pdf 198 Netflix Letter to Shareholders dated 14 October 2015, http://files.shareholder.com/downloads/NFLX/861339127x0x854558/9B28F30F-BF2F-4C5D-AAFF- AA9AA8F4779D/FINAL_Q3_15_Letter_to_Shareholders_With_Tables_.pdf
199 Ofcom written evidence to HoL enquiry into online platforms: http://data.parliament.uk/writtenevidence/committeeevidence.svc/evidencedocument/eu-internal- market-subcommittee/online-platforms-and-the-eu-digital-single-market/written/23277.pdf
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II. Audio
SPOTIFY
• major competitors include Amazon Prime Music and Apple
DEEZER
SOUNDCLOUD
GOOGLE PLAY MUSIC
AMAZON PRIME MUSIC • available only to subscribers to Amazon prime
APPLE MUSIC:
• acquisition of Beats • iTunes and Beats music subscribers transferred to Apple music • available on Android as well
"Take a look at the well-known streaming services in the US - Rhapsody, Rdio, Deezer, Google Play Music - add up the number of monthly users and Amazon Prime Music has more than all of them." 200 - Amazon Music
III. Visual Content
Getty Images
• "Largest providers of original visual content and a leading provider of commercial images online. It supplies and creates imagery and video to customers globally for a wide variety of uses, including websites, books, newspapers, magazines, film and television production, advertisements, and product packaging." 201 • Getty Images owns or represents more than 100 million unique works of digital imagery and makes this content available to its customers through its 32 offices, including ten based in the EU, and over 1,800 employees worldwide 202 • acts as a reseller (own content + licensed content): refers to itself as an "online publisher" • generates revenue by sublicensing
200 http://www.mirror.co.uk/news/technology-science/technology/amazon-prime-music-first-look- 6150941 201 Getty submission to HoL inquiry http://data.parliament.uk/writtenevidence/committeeevidence.svc/evidencedocument/eu-internal- market-subcommittee/online-platforms-and-the-eu-digital-single-market/written/23227.pdf 202 Getty submission to HoL inquiry http://data.parliament.uk/writtenevidence/committeeevidence.svc/evidencedocument/eu-internal- market-subcommittee/online-platforms-and-the-eu-digital-single-market/written/23227.pdf
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• information service = image search facility203
IV. Literary Content
Wikipedia https://www.academia.edu/
B. General description of the business model • Who are the users? For the most part, three-sided platforms, catering to content consumers, advertisers and content providers. Each user group has different needs and derives a different benefit from using the platform.
• What services does the platform deliver to all groups of users? • How does the platform make money? • revenue models204: o online advertising (Youtube) o subscription o on-demand payment o brokerage fees (e.g.?) o donations (Wikipedia)
C. Description of market dynamics • Is the market concentrated / fragmented – what are the market shares? • What are the factors leading to high / low concentration (network effects, lock-in, economies of scale?)
Factors leading to high concentration: o indirect network effects from content side, consumer side and advertiser side o direct network effects on consumer side: consumers could be tempted to use platforms which are also used by other consumers in order to be able to discuss content that is popular
Factors leading to low concentration: • multi-homing users (limited in paid subscription models due to the cost of paying an extra monthly fee in case of multi-homing);
203 "Image search services are specialised search services that allow users to search for images on the Internet based on a number of different criteria, including subject matter, colour, size, date, and more." Getty HoL submission http://data.parliament.uk/writtenevidence/committeeevidence.svc/evidencedocument/eu-internal- market-subcommittee/online-platforms-and-the-eu-digital-single-market/written/23227.pdf 204 OECD report "The Economic and Social Role of Internet Intermediaries"
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• multi-homing advertisers • do content providers multi-home? “For content providers, homing costs very much depend on the premium they can get for offering digital platform exclusivity, when contrasted with the incremental audience that can be reached by offering the same content on an additional platform.”205 • low to moderate lock-in effects
• Is entry likely to be difficult for newcomers (what are the main barriers)? • What might the market look like in the future (are these platforms expanding into new areas?)
D. What is the impact of this / these platform(s)? • On consumers (how many in EU, what do they gain?) • For suppliers (how many in EU, what do they gain / lose?) • Impact on innovation • General effect on the economy: jobs, growth • Impact in other areas (politics, environment, equality…)
E. What are the main concerns specifically associated with this type of platform
1. Data issues with content providers:
"Digital content is often supplied not in exchange for a price but against counter-performance other than money i.e. by giving access to personal data or other data. Those specific business models apply in different forms in a considerable part of the market." share of EU internet users who downloaded or accessed digital content without paying with money reached 82% for sport events, 80% for audio-visual content (films, series, video clips, TV content), 77% for music, 76% for games and 64% for e-books206
See Eurobarometer data:
205 http://www.onlineeconomy.org/author/kaki-ettinger/ 206European Commission - Fact Sheet Digital Contracts for Europe - Question & Answer http://europa.eu/rapid/press- release_MEMO-15-6265_en.htm; note to self: see from which study exactly those figures originate From the digital contract DG JUST proposal: For digital content, the rules will apply when consumers pay for their content with money or if they give their data to access the content (e.g. by registering to an online service/ social media).This will be relevant for a big share of EU consumers: during the last 12 months, the share of EU internet users who downloaded or accessed digital content without paying with money reached 82% for sport events, 80% for audio-visual content (films, series, video clips, TV content), 77% for music, 76% for games and 64% for e-books.
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• Flash Eurobarometer 396 "Retailers' attitudes towards cross-border trade and consumer protection" (2015) • Flash Eurobarometer 413 "Companies engaged in online activities" (2015), Q.11 • Eurostat Survey on Internet purchases by individuals (2015), • Flash Eurobarometer 397, “Consumer attitudes towards cross-border trade and consumer protection” (2014) • "Consumer surveys identifying the main cross-border obstacles to the Digital Single Market and where they matter most", GfK, 2015 • "Economic Study on Consumer Digital Content Products", ICF International, 2015 (to be published shortly) • Flash Eurobarometer 411, "Cross-border access to online content" (2015) • JRC Technical Report " The Macro-economic Impact of e-Commerce in the EU Digital Single Market", (2015)
2. Value Gap
3. Level-Playing Field and Responsibility Concerns
The AVMSD applies to television broadcasts and on-demand services. It regulates programmes that are TV-like207 and for which media service providers have editorial responsibility208. Article 1(c) of the AVMSD defines editorial responsibility as "the exercise of effective control both over the selection of the programmes and over their organisation either in a chronological schedule, in the case of television broadcasts, or in a catalogue, in the case of on-demand audiovisual media services". Thus, the AVMSD applies to online on-demand creative content providers which act as "resellers" of content that they have preciously selected by concluding license agreements with content creators (e.g. Netflix209). The AVMSD, however, does not apply to online video-sharing platforms and intermediaries which purely host third-party content without controlling the selection and organisation of the programmes. 210 These platforms and intermediaries are regulated primarily by the e-Commerce Directive (hereinafter "ECD"), which exempts them from liability for the content they transmit, store or host, under certain conditions.
The conditions for application of the ECD exemptions to certain creative content platforms have been subject to litigation both at EU level and on national level within member states [short overview of active/passive distinction].
8.1 Description of the main players • Which are the main platforms? When were they created? • What is their valuation / revenue?
207 Recital 24 of the AVMSD: It is characteristic of on-demand audiovisual media services that they are ‘television-like’, i.e. that they compete for the same audience as television broadcasts, and the nature and the means of access to the service would lead the user reasonably to expect regulatory protection within the scope of this Directive. In the light of this and in order to prevent disparities as regards free movement and competition, the concept of ‘programme’ should be interpreted in a dynamic way taking into account developments in television broadcasting. 208 Article 1(a)(1) defines an audio-visual media service as a service that is "under the editorial responsibility of a media service provider and the principal purpose of which is the provision of programmes, in order to inform, entertain or educate, to the general public by electronic communications networks" 209 Source…. Cite a case? 210 Source… cite a case?
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• Which other types of companies are in competition with these platforms?
8.2 General description of the business model • Who are the users? • What services does the platform deliver to all groups of users? • How does the platform make money?
8.3 Description of market dynamics • Is the market concentrated / fragmented – what are the market shares? • What are the factors leading to high / low concentration (network effects, lock-in, economies of scale?) • Is entry likely to be difficult for newcomers (what are the main barriers)? • What might the market look like in the future (are these platforms expanding into new areas?)
8.4 What is the impact of this / these platform(s)? • On consumers (how many in EU, what do they gain?) • For suppliers (how many in EU, what do they gain / lose?) • Impact on innovation • General effect on the economy: jobs, growth • Impact in other areas (politics, environment, equality…)
8.5. Key characteristics relevant for policy • in the literature? • in the public consultation? • raised by experts in workshops / roundtables?
8.6 Key issues
III. Issues raised by online platforms
The rapid rise of online platforms since the late 1990s has revolutionised virtually all aspects of daily life, by exploiting the power of network effects and machine -learning algorithms in everything from e-commerce and banking, to media and human resources. At the same time, the regulatory framework is only now being gradually adjusted to their presence. Based on its comprehensive assessment of online platforms, the Commis sion has in this regard identified a number of 'online platform'-specific challenges in those areas where an apparent regulatory 'gap' currently exists:
i. Ensuring continued platform-driven innovation; ii. Enhancing transparency; iii. Clarifying liability / responsibility; iv. Ensuring that the EU fully benefits from its creative and business potential.
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1. Europe’s position as a leader in the digital economy
1.1 Online platforms bring benefits to EU consumers
1.2 Online platforms facilitate access to consumers for businesses
1. 3 Online platforms are important for innovation
1.3 Lack of successful online platforms as a threat to EUs leadership in the data economy Platforms foster economic growth, innovation and lower the costs of entry for businesses. They also have a societal role in supporting public policies, enabling social interaction and empowering citizens and consumers. 96% of successful online platforms (by market value) are located outside of the EU. The regulatory framework and policy actions should favour the creation and expansion of online platforms in the EU.
Only 27 European platforms as part of the top 176 global platforms of more than $1 bn capitalisation, against 67 from North America and 82 in Asia. The total value of these platforms is more than 4.3 trillion USD, with EU platforms representing only 4% of these platforms globally.
Stockholm, London and Berlin are the leading cities in the EU but with far fewer platforms than US or Asian couterparts.
Given that there is a risk of increasing disintermediation of traditional industries where Europe is strong (e.g. automotive) and that it is usually easier to leverage the existing customer base of an online platform to conquer a new market than to create a platform from scratch, Europe may be suffer a long-lasting disadvantage in relation to ther regions of the world (North America, Asia).
1.4 Challenges limiting growth of online platforms in the EU Some of the key factors that explain the relative weakness of EU platforms as part of the global platform ecosystem: Lack of trust (past euro barometer) by consumers Remaining obstacles to expand into the EU market : tax, business registration Lack of legal clarity about what is possible / not possible Lack of recognition of self-regulatory body (UK paper) Fear of new, intrusive regulation in the future (Estonian government) A lack of positive political attitude towards platforms
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1.5 Current strategies: DSM, SMS
1.6 Conclusion
- limit fragmentation,
- DSM initiatives important for online platforms: digital contracts, digital skills, free flow of data etc.
- increase legal clarity / guidance
2. Fair competition and B2B relations
2.1 Online platforms and market power (overview of relevant literature: JRC) 2.1.1 Need to look at both sides of the market to provide competition assessment
2.2 Significance of data and algorithms 2.2.1 Potential need to enhance the information-gathering powers, increasing analytical capacity, streamlining of procedures,
2.3 Access to online platforms (interoperability, open / closed platforms) 2.3.1 CMA / Autorite de la Concurrence paper on open / closed systems – annexed to UK HMG reply to consultation 2.3.2 Closed systems have their benefits – openness may not be always beneficial
Respondents raised the issue of certain platforms occupying a key role with regard to access to certain markets. Access to these platforms may be required for suppliers active in some markets (e.g. application development, music streaming services). An unjustified refusal to allow access to these platforms may block new entrants or force existing suppliers to exit a market.
2.3.3
2.4 Discriminatory conditions of access for suppliers
2.4 Unilateral imposition of terms & conditions due to strong bargaining power of online platforms
2.5 Constraints on the ability of individuals and businesses to move from one platform to another Avoiding lock-in, facilitating data portability (personal data, commercial data, portability of reviews / reputation?)
2.5 Bargaining power of online platforms – unilateral imposition of terms & conditions
2.6 Regulatory level playing field (sectoral legislation) 2.3.4 Need for guidance on how existing Single Market rules , including the Services Directive and the E-Commerce Directive, apply to the collaborative economy 2.3.5 Clarification of how existing sectoral legislation applies
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2.3.6 Review of regulation of traditional operators to ensure that it is flexible, not burdensome, and minimises barriers to entry.
2.7 Protectionist / disproportionate local and national restrictions on collaborative economy Services Directive
Single Points of Contact (enforcement)
2.8 Existing regulation regulatory framework
- Competition law – Art 101, 102
- Competition sector enquiries
- Arbitration mechanisms – examples
- Services Directive
- Ecommerce Directive
2.9 Conclusion
- a “more technological approach” to competition policy – increase capacity of competition & data protection authorities to understand data / algorithms,
- encourage platforms to offer access in all Member States – facilitate entry,
- Alternative Dispute Resolution for small businesses,
- continue review of sectoral regulation – media, transport, hospitality etc– to create a level playing field,
- enforcement of data portability under Art 18 of GDPR – necessary to define “personal data”)
Access to platforms Digital platforms have several positive effects for businesses and consumers, boosting innovation and competition. For SMEs and small retailers in particular they can enhance visibility and create new opportunities to trade cross-border. For consumers they can facilitate new means of communicating and transacting with businesses, making it easier to compare prices and choosing the right products and services. Some e-Commerce platforms, for instance, are offering alternative payment methods which promote competition and grow the overall market. At the same time certain digital platforms exercise significant influence over other actors in the digital economy. Typically, concerns have been raised about the amount of user-generated data they collect and control and their potential power to influence the terms and conditions for access to the services they offer third-parties. The wide scope and various definitions of
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platforms also mean that issues related to 'access to platforms' are complex and hard to delineate. In order to structure our initial thinking it might be useful to look at how anti-competitive conduct is identified in the context of the regulatory framework for electronic communications211, and how access to facilities and customers is addressed. As with access to networks and services, many issues related to access to digital platforms can presumptively be addressed by competition law. However, in general ex-ante regulation of conduct can have some advantages over ex-post competition law with regard to swiftness of intervention, predictability for market participants and resource use. A key concern is to avoid overreach and micromanagement and only intervene where there is a clearly identified need. In emerging markets the principle of forbearance should be applied, whereby authorities rely on markets as much as possible and have a clear bias against intervention. This principle may also be relevant in dynamic markets where competitive pressures are difficult to detect or where market power is only transitory. At least the principle of forbearance should be used as to caution against picking and choosing; protecting the viability of certain businesses or business models rather than others. Given the wide range of business models covered by the term online platforms, access in this area may mean different things to different players along the digital value chain. In most cases it will not be a question of denial of access per se (refusal to supply B2B or B2C), but about the terms and conditions which the access seekers, typically content and application providers, achieve vis-à-vis the access givers or digital platforms in B2B relationships.
One common feature identified is the need to ensure that there is no discrimination with regard to access terms and conditions. Discrimination can manifest itself in two ways: 1) solely between the external players who seek access and/or 2) between the third party access seekers and the access giver's own downstream business in the case of a vertical integration.
An important difference between access in the area of electronic communications and access to online platforms is that the latter does not involve the use of physical infrastructure (networks and access lines) as the only means of reaching end-users or achieving societal ends like all-to-all communication. Ownership of legacy access network for instance, typically gives the incumbent telecom provider control of an essential facility which involves large degree of sunk costs and which it is uneconomical for the alternative providers to duplicate. In case there are no close substitutes a natural monopoly exists.
211 The regulatory framework for electronic communications networks and services (Telecoms Package) consists of: − Directive 2002/21/EC on a common regulatory framework for electronic communications networks and services (Framework Directive) − Directive 2002/20/EC on the authorisation of electronic communications networks and services (Authorisation Directive) − Directive 2002/19/EC on access to, and interconnection of, electronic communications networks and associated facilities (Access Directive) − Directive 2002/22/EC on universal service and users' rights relating to electronic communications networks and services (Universal Service Directive) − Directive 2002/58/EC concerning the processing of personal data and the protection of privacy in the electronic communications sector (Directive on privacy and electronic communications)
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Instead of sunk costs related to physical infrastructure, with regard to online platforms market power is more likely to come from network effects, superior service, brand value and financial resources. This is an important distinction which may mean that barriers to entry into these markets are easier to overcome in the long-run.
On the other hand, due to the strong network effects, only a few online platforms are likely to survive and dominate the markets, e.g. the markets for search or social networking. They are therefore often referred to as 'winner-take-most' or 'few-winners-take-all' markets. Even though they do not become 'winner-take-all' businesses, since there are increasing returns to data, the concentration of user data in the hands of a few players may lead to entry barriers. These can give rise to access problems for competitors and new entrants that need user data as input for providing competing services.
Independent of whether the essential facility doctrine is relevant, however, with regard to online platforms, some companies, like Google or Apple, can today largely influence which content or app gets the chance to succeed. In other words, they have the power to decide, or at least to influence, what can be offered and to whom though the conditions offered to third parties.
Several of the means by which the conditions for access can be made unfavourable to third-parties in the areas of electronic communications are potentially applicable to digital platforms as well. These include practices such as:
§ Refusals to deal, for example a refusal to supply an essential facility to a competitor.
§ Exclusive dealing arrangements, in which a seller prevents its distributors from selling competing products or services.
§ Misuse of information whereby the (vertically integrated) access giver can obtain valuable commercial or business information through its wholesale transactions that gives it a competitive advantage in its retail activities. This can either involve using information obtained from competitors to improve its own services or withholding or limiting access to information for third-parties (e.g. behavioural data in the case of online platforms).
§ Customer lock-in whereby the access giver may attempt to lock in customers to prevent them from switching to alternative products, suppliers or platforms. Customer lock-in involves raising customers’ switching costs to the point that the cost of switching outweighs the potential benefits from switching. Whereas in the area of electronic communications switching costs are often linked to costs of replacing technology or equipment, with regard to digital platforms switching costs are more likely linked to ownership of data issues and/or other contractual conditions.
§ Tying and bundling, where an access giver makes the purchase of one product or service conditional on the purchase of a second product or service.
§ Exclusionary or predatory pricing, where a company sets prices independent of costs in order to harm or force competitor(s) out of the market.
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§ Non-price predation, where a company adjusts the quality of its product offering to customers with the aim of harming its competitors. For example, the access giver might offer an improved level of service to customers served by a third-party.
An electronic communication provider or an online platform does not need to be dominant in order to define conditions for access which harm competitors. Also, even if the company is found to be dominant in a relevant market, the behaviour does not necessarily constitute and abuse of its position. The key question is whether the behaviour is harmful to competition and to consumers. It is important to distinguish between aggressively competitive behaviour that harms individual competitors but benefits customers (for example by reducing prices or increasing access to information), and behaviour that is anti-competitive because it harms competition per se.
Because the digital flow of commerce is increasingly based on disintermediation/vertical integration (Apple selling directly music through iTunes for instance, Google offering Google Shopping platforms etc.), there are more concentrated players in flatter distribution networks, and this increases the risk of abuses of dominance and monopolistic approaches. In this context SMEs can have particular problems and a powerful platform could favour its own 'in-house application or service' when compared to the service of other application providers (e.g. Google Maps).
A key concern is how to put in place mechanisms which ensure that platforms are neutral towards developers and businesses using their platform. Digital platforms can for instance require developers to adapt their apps to software specifications in each platform, having to rely on unclear and changeable terms as regards APIs and price conditions, and being disadvantaged vis-à-vis equivalent services of the platform.
Another important aspect is the access to user data which is increasingly the modus operandi of digital platforms. This may give rise to access problems for competitors and new entrants that need access to data gathered by dominant platforms in order to provide competing or complementary services.
In general it is an issue that consumers and SME don´t have enough power to negotiate terms and conditions with large digital platforms, therefore increasing the risk of abuse. The more critical the platform is for the provision of a service, the more responsibility it should also bear for safeguarding competition and ensuring customer satisfaction with the service.
More concretely on problems related to B2B access to online platforms:
Fair terms of access to platforms has become crucial for online companies, particularly when the platform turns into the only/or the main entry point to the market for other businesses. The problems outlined below concern relations between a platform (access provider) and another business (access seeker). Controversial practices restricting fair access to platforms reported by stakeholders include:
a) Platforms policing market access. Platforms have sole discretion as to when and how to grant or withdraw access.
For example, Amazon and Etsy reserve the right to exclude any company, without warning, if there is a suspicion (no concrete evidence is needed) that the platform's terms and conditions are not met.
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Contesting this decision is a lengthy and burdensome process, made more difficult by the fact that many platforms do not have a complaint handling mechanism for B2B relations.
b) Platforms are vertically integrated and misuse information (uses information to promote its own retail activities). Some platforms act as am access giver and a retailer at the same time. These platforms may use the transactional data acquired from business users of the marketplace segment to enhance the performance of the platform's retail arm and eliminate competitors.
For instance, Amazon has access to data about all transactions taking place on their marketplace and full discretion as to how to use this data. Online merchants are clients and competitors of Amazon at the same time. Amazon enjoys a competitive edge as competitors have to pay a fee for being present on its marketplace where at the same time Amazon offers competing products without having to pay the same fees.
c) Non transparent pricing. Virtually all online platforms have a fee model based on a listing fee (applicable when a product is listed on the website) and a referral fee (a percentage of the final selling price for each product). Such referral fees can vary from 5 to 20% of the final selling price.
For instance, when a platform dominates the market it becomes the main entry point to that market (e.g. Tripadvisor, booking.com) and is able to charge its fees with full discretion. These high fees can become a barrier to access by new business users. Lack of transparency of pricing is often argued with reference to Google auction system for ad-words (develop). CHECK BTO FROM TRIPADVISOR MEETING ON TRANSPARENCY OF TERMS.
d) Restrictions on pricing. Some platforms simply forbid companies to sell cheaper elsewhere (including the seller's own website, other platforms and all offline distribution channels). The issue has been examined by various competition authorities and sometimes results in unilateral commitments by some platforms.
For instance both Amazon's and Booking.com's terms of use include such "best price clauses", which forbid companies to offer lower prices on any other online distribution channels than they offer on the platform.
e) Platform fees and contract terms hamper innovation and are detrimental to European companies. Concentration at the platform level may lead to unfair access terms (e.g. loss of revenue, lock-in) for app developers.
For instance, EU app developers account for 42% of the global consumer app revenue, but the overall EU trade balance of the app economy is negative (-€128 million), mostly due to the app platform fees that EU developers pay on revenue earned to North American platform owners.212
f) Discrimination in listing between platforms' own services and third party services. This issue occurred in a specific case regarding Google's search service, when Google started
212 Sizing the EU app economy, Gigacom Research, February 2014.
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placing their own vertical services (e.g.: shopping) on the top of the page, which reduced the part occupied by organic search results on the first page of results.
3. Consumer protection
Online platforms have empowered consumers with unprecedented levels of knowledge about individual markets. By creating new review and feedback mechanisms, they are offering new answers to many of the challenges which previously have been addressed by regulation. They also increase the choice for consumers by lowering the barriers to entry for new companies.
3.1 Transparency of terms and conditions There is evidence that few consumers read and understand terms and conditions. A 2014 study conducted by the German Verbraucherzentrale in 2014 found that 53% of the surveyed consumers "always"(27%) or "mostly" (26%) agree to the terms and conditions without having read them213. Only 16% of consumers always read the terms and conditions. 72% of respondents stated that terms and conditions are too long and complex.
This information should empower consumers to make informed decisions and not serve the sole purpose of being a liability waiver for companies.
To ensure transparency and build trust with consumers, platforms should clearly explain how reputation systems function.
3.2 Trust in review mechanisms
23 billion GBP of consumer spending potentially influenced by online reviews (CMA study in the UK)
UCPD could apply to the practice of faking reviews or cherry-picking
Evidence that companies are taking action (?)- companies compete based on the quality of their reviews
Excessive [burden of quality] may discourage online platforms from posting reviews iPerceptions Survey in 2011 – 63% of customers are more likely to make a purchase from a site that has user reviews (UK HMG reply – page 26)
3.3 Responsibility of platforms for third party content / offers
Responsibility Differences in the role of platforms as intermediaries or resellers may have implications for their liability towards consumers. In a subsequent paper, Hagiu & Wright (2015b) expand this model with two additional typologies: the vertically integrated firm (VI) where supply is completely integrated
213 www.vzbv.de/pressemitteilung/digitalisierung-neue-herausforderungen-fuer-politik-und-verbraucher
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into the intermediary platform and the input supplier (IS) where supply is totally disconnected from the intermediary platform214. When professional firms vertically integrate they control the provision of the services and are directly responsible for them; in MSM mode (i.e., they consider examples such as Uber, Lyft, and Elance–oDesk.com) the suppliers of services retain responsibility for and residual control rights over the services. The fundamental trade-off in this strategic choice is between the coordination benefits that arise in a VI model and the benefits of motivating professionals' effort and getting professionals to adapt their decisions to their private information that arise in a MSM model. In the VI mode there is a possibility for professional efforts ‘moral hazard’; on the other hand, in the MPS mode there can be information-related moral hazard by online platforms that can extract insights from the aggregate data generated by the interactions between contractors and customers on their sites—insights that are not known to any individual contractor. Apple hardware and Amazon Kindle are examples of VI: Apple and Amazon design and sells their own hardware. Apple iTunes however allows external suppliers to contribute software and content to the Apple platform. Microsoft Windows is an example of an IS structure: any hardware manufacturer can produce Windows-compatible hardware without any formal affiliation with Microsoft. Again, the degree of platform (dis)integration in VI and IS extension of the M/R model is driven by information asymmetries between different actors in the supply chain.
3.4 Existing regulatory framework and its enforcement
- Consumer Rights Directive
- Unfair Commercial Practices Directive – are the obligations implemented effectively in all member states?
- International Consumer Protection and Enforcement Network (ICPEN)
- CPC Network
3.5 Conclusion
- clarification / guidance on the application of consumer protection legislation,
- need to encourage online platforms to formulate their terms and conditions upfront, clearly and succinctly – eg. Which? Campaign in the UK)
4. Personal data protection
214 For Rysman (2009), the R, VI and IS modes are single-sided markets, not MSM or special cases of a MSM.
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Data is central to the activities of platforms, since so many of them are involved in matching disparate parties: the more relevant information the platform has about parties, the better it is able to provide a match which adds value to both parties215. Data allows platforms to improve their services, reduce their costs in terms of business processes and limit risks they undertake resulting in savings which may be passed on to consumers.
CMA 2015 report: Increasing collection and use of data by online platforms provides significant value. The beneficial use of that data is dependent on the agreement and trust of consumers who often lack understanding.
4.1 Use of data by online platforms The connected world is producing data216 at an ever increasing rate. Less than a decade ago, the International Data Corporation estimated that the size of 'the digital universe' was about 130 exabytes217. By 2010 that had grown to an estimate of 1,227 exabytes218 and accumulated data keeps growing 40% a year, expanding to include not only the increasing number of people and enterprises doing everything online, but also all the “things” – smart devices – connected to the Internet, unleashing a new wave of opportunities for businesses and people around the world.
Data is the most important input factor in the digital economy. What differentiates data from other input factors is that data is virtually non-finite. It can be reused again and again without necessarily losing its value and it can be reused in multiple ways for achieving different results (personalisation, statistics, identifying trends, etc.).
Data is more often than not the property of the company that accumulates it, which is the sole decider on how the data should be stored, accessed, used and re-used. This means that whoever manages to get the biggest amounts of data has a significant market advantage. This is also the rationale that led to the rise and then dominance of 'big data' market players.
Platforms are such big data market players. For example, Facebook has nearly 1.5 billion active users, each generating a considerable amount of data (when Max Schrems asked for all the personal data Facebook had on him he received a 496MB file, equivalent to 1,222 pages219).
Platforms are also the most visited websites in the world. A small number of platforms are currently the main starting pages for browsing the Internet (in 2001, the top 10 websites accounted for 31 percent of all U.S. page views, but, by 2010, they accounted for 75 percent of them. Virtually all top 10 websites are platforms220).
215 UK CMA, Commercial Use of Data report, 2015. 216 According to ISO/IEC 2382-1, data are "a reinterpretable representation of information in a formalized manner, suitable for communication, interpretation or processing". Data can either be created/authored by people or generated by machines/sensors. Often, it is generated as a "by-product" of other processes. 217 1 exabyte = 1 billion GB 218 The data economy Report, Raconteur, 2014 219 http://qz.com/162791/how-a-bureaucrat-in-a-struggling-country-at-the-edge-of-europe-found- himself-safeguarding-the-worlds-data/ 220 http://www.nytimes.com/2014/10/31/opinion/david-brooks-our-machine-masters.html
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How data is gathered Data can be gathered directly from the user, bought from a data stock market or received through the help of trackers that follow the user on the Internet.
User generated data Users generate data in two ways, consciously and unconsciously. Conscious data is data that the user uploads or that follows a conscious decision by the user (uploading content, status updates, Internet searches, purchase of a product). Having users active and generating content or purchasing goods and services is essential for the success of a platform. Ensuring the right number of interacting users and content that would keep users engaged and attract other new users is crucial in obtaining the critical mass that an online platform needs in order to become successful.
Unconscious data can be generated by the user's technical means to access an online platform (IP address, location, operating system, Internet browser version, etc.) or by the user's behaviour on the platform (cursor tracking, clicking history, product history, payment history, etc.).
Data brokers The core business objective of data brokers is to collect and aggregate all types of data. In this respect, data brokers gather and process a variety of data streams and then sell or lease access to information and intelligence services to their clients.
Most data brokers focus on the B2B market segment, as it is the most lucrative. Nevertheless, some B2C data brokers exist, usually providing consumers with insights on consumer goods and services.
Data marketplaces In the online world, having varied and complex data strands put together allows for better personalization or monetization of the platform that uses them. Investing in getting such data strands for instance on demographics, location or market trends over a long period of time can be very resource consuming for an online platform. A solution is purchasing data from a data marketplace.
Data marketplaces typically offer various types of data for different markets and from different sources. Common types of data sold include business intelligence, advertising, demographics, personal information, research and market data. Data types can be mixed and structured in a variety of ways. Data vendors may offer data in specific formats for individual clients.
In order for a marketplace to be successful, it must ensure the following things221:
• data is gathered from a multiplicity of suppliers • data is curated (to mean, at minimum, ensuring quality, tagging with provenance and other factors as appropriate to a given data type, and more) • data is indexed to make it straightforward for buyers to find out what they require, and • data is vended with a pricing/billing methodology.
221 http://www.computerworld.com/article/2997079/e-commerce/the-rise-of-big-data- marketplaces.html
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70% of large organizations already purchase external data and 100% will do so by 2019. In parallel more organizations will begin to monetize their data by selling them or providing value-added content222.
The rise of data brokers and data marketplaces have led to concerns about the personal data that is traded and a discussion on who owns the data that is traded. But the complexity of data processing makes it that establishing a concept of 'data ownership' is virtually impossible. First of all, data, in its most raw form, is a piece of information that needs to be properly used in order to be transformed into useful information. Second, the data is then looked at from multiple perspectives, each providing a different type of information that must then be gathered to get a better picture. Overall, the data value chain becomes so complex that in many cases no single data stakeholder will have exclusive rights. Granting private property rights on the personal data of a user has been suggested as a solution to the issue of ownership.
Tracking users on the web All websites track users either directly (first-party requests) or by including elements on websites (pictures, javascript codes, etc.) that record the user accessing a website and the activity done there (third-party requests).
Some third-party requests also store information on the user's computer, in the form of cookies. Even if a user visits unrelated sites, tracking cookies ensure that users are traceable and data is collected on what the user searches, buy or the content viewed. This ensures that enough data can be gathered in order to understand the user's behavioural patterns.
Third party tracking is very prevalent on the Internet. Sites that make such requests contact on average 9.47 distinct domains. Big news sites run an average of 27.8 different third-party tags on their pages223.
There is a significant level of corporate ownership on tracking mechanisms. 78% of the websites in the Alexa top million initiate third party HTTP requests to a Google-owned domain. The next company, Facebook, is found on 32% of websites, followed by Akamai (23%)224.
This data is then anonymized (online platforms claim they do not sell information that can personally identify the user) and then sold to advertisers in order to ensure targeted/personalized ads. This is done often within seconds of visiting a website affiliated of a tracking company225.
4.2 Benefits of data collection to consumers and online platforms Warsaw Institute for Economic Studies (2014) – by 2020 big and open data will improve European GDP by 1.9%
CMA Study attached to the UK reply to the consultation
Concerns about the collection of personal data The market trend of online platforms gathering as much data as possible from multiple sources has raised important concerns among European citizens about how their personal data is gathered,
222 http://www.idc.com/getdoc.jsp?containerId=prUS25329114 223 http://digiday.com/publishers/publishers-big-weakness-slow-mobile-load-time/ 224 http://ijoc.org/index.php/ijoc/article/view/3646/1503 225 Data driven innovation, OECD
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analysed and monetized. While most citizens accept that, in the digital age, data collection is a part of modern life, over 70% believe that explicit approval should be required before any kind of personal information is collected and processed. This finding contrasts visibly with the fact that only 15% of EU citizens feel they have complete control over the information they provide online.
It also bears mentioning that companies are able to ensure that a citizen gives consent to the gathering and processing of data even though the citizen is not aware of this (accepting that a website uses cookies is considered consent from the user to be tracked through these cookies).
This situation causes major distrust among European citizens in using online services (mostly for the risk of fraud): less than 25% of Europeans trust online platforms such as search engines to protect their personal data. Furthermore, over 66% of European citizens feel that they don't control their personal data and are concerned by this.
How data is analysed - Big data
What it is Practically every activity or interaction on the Internet is recorded. As the Internet expanded both in size and number of users, this has led to a dramatic accumulation of data.
For instance, the online retail sector is now able to track in real time what users look at, what options they prefer or discard and what is purchased. Upstream, they are constantly monitoring the logistics chain, with real-time inventories and delivery. An extra layer of added value comes from combining the data around the sale itself with elements regarding customer preferences, demographics, advertising, credit history or social media interaction.
Therefore, we can consider Big Data as referring to extremely large, dis-aggregated data sets that may be analysed in order to reveal patters, trends and associations.
Another common definition is to simply consider Big Data as such a large and complex data set that cannot be processed and analysed through typical database software tools. While this is a rather subjective view, it does allow enough leeway as to have a definition that adapts to market developments.
The 3 Vs To characterise the Big Data phenomenon, as a rule, reference is made to the concept of the 3Vs:
- volume (ever increasing) - variety (every consumer is a data point, with data being collected on novel types of variable such as geolocation, messages, etc.) - velocity (data is acquired in real time and needs real time processing).
There is a fourth challenge that is often considered, namely veracity referring to the trustworthiness of data.
Benefits and challenges of Big Data Big data technologies help companies optimise their business process, reducing costs and offer a much more adapted offer to customers. It can identify new market trends or opportunities. When open, it
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can be used for scientific research that allows deeper insight into economic or socio-demographic trends.
However, big data raises some significant challenges as well. The first is related to hardware. Storage and computing power are essential elements in processing big data and there are concerns about the capacity of current technology to keep up with the frantic growing pace of data gathering. Companies, especially small ones, sometimes don't have the financial and human resources to deal with this vast amount of data and tend to lose out (46% of UK firms can't do data mining because they have the wrong IT. Some 75% lack the understanding, expertise and logistics to do it). Cloud services are a potential solution to this problem.
The second is related to the data itself. Data currently has much less structure. Traditionally, when gathering data, a study had a large number of observations with a small number of variables. This is not the case for big data, where there are many variables. An important challenge is to identify what is relevant data and what is useless. Data is also not interoperable. Companies gather as much data as possible, but do not share it or make it interoperable, but rather sell it, mostly for advertising purposes. This raises significant data protection and personal data management issues.
What data is used for Platforms use data in very different forms, depending on their business model. Nevertheless, data is used often for certain common objectives for all platforms, as explained below.
Dynamic pricing Dynamic pricing is the practice of pricing items at a level determined by a particular customer's perceived ability to pay. This type of pricing model has been helped considerably by big data analytics, which can now show two different prices for the same product to two different consumers based on their Internet history, location, operating system used, time of day, etc. Dynamic prices have been used for years now by the hotel, transport or ticketing industries.
For example, Uber uses data such as GPS location, street data and company algorithms to help calculate fares, calculating the distance and, more especially and differently compared to taxis, estimated time of the journey. The capacity to estimate the time of the journey based on traffic conditions and number of Uber requests has led to what Uber calls 'surge pricing', a form of dynamic pricing that estimates demand in real time and adjusts ride prices accordingly (prices in the app are updated every five minutes226).
Amazon is one of the most aggressive online platforms when it comes to dynamic pricing. In addition to customer specific data, Amazon constantly tracks the prices of its competitors (both outside and within the platform). This in turn allows Amazon to identify the most popular products and change prices on the fly to attract shoppers looking for deals (Amazon has been estimated to alter its prices more than 2.5 million times daily227). This also enables Amazon to look at different price points and customer reaction, and then identify the optimum low prices during sales periods.
226 http://qz.com/536440/how-to-avoid-surge-pricing-on-uber/ 227 http://www.businessinsider.com/amazon-price-tracking-2014-8?IR=T
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Personalization E-commerce platforms and content hosting platforms rely on techniques such as wish lists, browsing habits, subscriptions, purchasing or viewing history in order to create individualized product suggestions. Beyond product recommendations, platforms today can directly engage customers through customized e-mails, promo codes, social interactions, geolocation, reviews or customer service logs in order to accumulate more personalized data and provide a more tailored offer.
Social networks are also important players in the personalization trend. For example, Facebook uses three levels of data in order to ensure personalization of content. The first one is native data, i.e. the data that is directly issued by the user (both data of which the consumer is conscious – uploaded content, shared links, etc. and 'exhaust' data, IP, time of visit, duration of visit, clicks, cursor moves, etc.). Based on this data and using proprietary algorithms, Facebook decides on what content will be shown to the user.
The second level is combining user data with first-party data from brands. User data is overlaid with brand data and personalized offers/advertisement can be offered.
The third layer is adding third-party data, purchased from other companies. This allows for even better knowledge of users and allows brands to better modulate their message to users.
Monetizing data Turning data into a valuable asset that brings profit to a company is a difficult process, especially since the potential of generating revenue from data has not been explored in depth so far.
Three main types of data monetization strategies seem to exist: a) Using data as a product: data can be bought or sold, just like any other product, on a market place. It can then be used as is, or multiple data streams can be combined in order to ensure a more refined service. A typical example of using data 'as is' is the purchase of a sales database. An example of a combination of several data streams is for a travel agency to get weather forecast data, combine it with flight data and offer tourism packages based on the two. b) Using data as a service: a customer would buy access to the data, but not the data itself. Bloomberg, for instance, sells terminals that enable professionals in finance and other industries to have access to real time financial market data and place trades on the electronic trading platform. c) Data as an app: Companies accumulate large amounts of data and create aps/websites that consumers must use in order to interact with the information. Revenue is then obtained by either selling the app at a price, charging one of the sides that uses the app (in real estate apps/websites the seller pays the fee) or hosting ads.
Online Advertising Advertising is where most of the income of a multi-sided platform comes from. Digital ad spending worldwide is estimated at around 170 billion $228, with search ads accounting for 81.5 billion $. This is a very fast growing market, in all the online advertising components (search, non-search, mobile).
228 http://www.emarketer.com/Article/Google-Will-Take-55-of-Search-Ad-Dollars-Globally- 2015/1012294
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Search Advertising is a method of placing online advertisements on web pages that show results from search engine queries. Through the same search-engine advertising services, ads can also be placed on Web pages with other published. Search advertisements are targeted to match key search terms (called keywords) entered on search engines. This targeting ability has contributed to the attractiveness of search advertising for advertisers. Consumers will often use a search engine to identify and compare purchasing options immediately before making a purchasing decision. The opportunity to present consumers with advertisements tailored to their immediate buying interests encourages consumers to click on search ads instead of unpaid search results, which are often less relevant. Search based advertising accounts for almost half of all online advertising worldwide. The same situation takes place in Europe (Monopol Kommission data).
Non search based advertising can take multiple forms, such as pay-per-click advertising, native advertising (advertising that matches form and function of the platform on which it appears), embedded advertising or ads at the beginning of in the middle of online videos.
Online platforms and the global data value chain229 All data driven business models require an ecosystem within which they must be implemented. The foundation of the ecosystem is formed by the necessary IT infrastructure (cloud computing, storage, processing power), as well as the programming framework for data processing (Hadoop, Cassandra). On top of this, the analytical tools and the domain specific applications are added.
A company can be part of different layers of the data ecosystem simultaneously (Amazon ensures cloud services and processing power, but it also acts as a data broker, gathering and buying data, and as a data driven entrepreneur, using the data to sell better).
Because of the complexity of the data value chain, companies active in the field of data need to involve third parties that can provide the missing experience, technological resources or talent needed. Often these third parties are international, which results in an interwoven network of companies that create global data ecosystems, where data and analytic services are traded and used across sectors and national borders.
As shown above multisided online platforms can occupy several layers of the global data ecosystems. This puts platforms in a position to control data (acquire it from users or trading it), but also key elements of the ecosystems, such as APIs or property rights on data. Thus platforms are able to create their own data ecosystem, walled from the rest of the global value chain, controlling access to the ecosystem and locking in users.
In the case of mobile application (app) platforms (e.g. Apple’s App Store and Google Play), for example, consumers may be locked in due to upfront investments in both the hardware and software needed to access the platform, and barriers to data portability that prevent them from reusing their data in other applications. Developers may also be locked in due to upfront investments needed to develop the applications (including in particular the skills and competencies needed).
Platform providers can consequently exploit the “stickiness” and lock-in effects of their platforms to reinforce their positions on all sides of their markets.
229 Data driven innovation, OECD
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4.3 How data affects market competition Since online platforms are, at their core, data-driven services providers, they require constant accumulation of data in order to improve their offer. Data is bought or collected and then, with the help of data analysis and algorithms, online platforms create a more personalized experience for their users. This in turn allows the platform to attract even more users and even more data (positive feedback), leading, in time, to a reinforcement of the market position of the most successful online platforms.
Assessing the degree of market concentration in the field of online platforms is difficult; as this is a new sector, where traditional competition instruments to measure market effects don't necessarily apply.
Multi-sided markets, such as enabled by data, challenge the traditional market definition, which generally focuses on one side of the market. That approach would tend to define the relevant market too narrowly in a multi-sided market case.
Focusing on one side of market will rarely lead to a proper market definition. An extended market definition is also justified due to the cross-subsidies often used across multiple sides of the platform. In other words, a proper market definition would have to include all sides involved in the cross-subsidy. Overall, as OECD (2009) highlights, it cannot be assumed that market power and abuse are any less prevalent in multi-sided markets than in traditional markets.
The difficulties in defining the relevant market translate also in measuring the market power of an online platform. Market power is usually defined as the ability of a company to raise and sustain prices over marginal cost. However, a large share of data-driven products are provided for “free” in exchange for access to personal data, and/or in addition to an offer of a premium version as in the case of the freemium revenue model. In these cases information on prices for the single product will rarely be available, rendering it difficult to assess the degree of market power if applying the narrow market definition discussed above.
As regards the detriment to consumers, this is traditionally looked at from the perspective of prices incurred by the consumer. This does not apply to online platforms, since these are entities that are very consumer oriented, offering their services to consumers at no or very low costs. Therefore, new ways of measuring consumer detriment have to be taken into account, such as access, quality, information, variety of choices or market innovation.
An additional area were consumer detriment could be analysed is privacy harms incurred by the consumers when offering their personal data to online platforms. The same logic can be applied to non-personal data, as the accumulation and control of M2M and sensor data, for example, may raise a number of competition issues in the near future, as data and analytics are increasingly used in areas such as manufacturing and agriculture where non-personal data may become a strategic point of control as well.
Furthermore, it should be highlighted that most competition jurisdictions only enable their authorities to block or challenge anticompetitive practices in which the consequent lessening of competition leads to detriment. If no competition issues are raised, competition authorities will have no jurisdiction. For example, a merger between two companies that do not in any way compete, but whose data sets
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when combined create links that harm the privacy of consumers, would generate a detriment, but no loss of competition. It that case, competition authorities may not have the right to take action, but consumer and/or privacy protection authorities would.
4.4 Transparency and consumer trust regarding the collection and use of personal data
4.5 Current regulatory and enforcement framework in the EU
- ePrivacy Directive
- GDPR
4.6 Conclusion
- work with platforms to improve accessibility and presentation of information
- improve enforcement capacity (strengthen EDPS – data “watchdog”)
United States of America In the US, there is no single, comprehensive federal (national) law regulating the collection and use of personal data. Instead, the US has a system of federal and state laws and regulations, as well as a series of guidelines, developed by governmental agencies and industry groups that are self-regulatory or are considered "best practices". These self-regulatory frameworks have accountability and enforcement components that are increasingly being used as a tool for enforcement by regulators, like the Federal Trade Commission (FTC).
The Supreme Court interpreted the Constitution to grant a right of privacy to individuals in Griswold v. Connecticut. Very few states, however, recognize an individual's right to privacy, a notable exception being California.
Recently, lawmakers in several states have proposed legislations to change the way online businesses handle user information. Among those generating significant attention are several Do Not Track legislations and the Right to Know Act.
There is no single regulatory authority dedicated to overseeing data protection law in the US. At the federal level, the regulatory authority responsible for oversight depends on the law or regulation in question. In the financial services context, for example, various financial services regulators (as well as state insurance regulators) have adopted standards pursuant to the Gramm-Leach-Bliley Act (GLB) that dictate how firms subject to their regulation may collect, use and disclose non-public personal information. Similarly, in the health-care context, the Department of Health and Human Services is
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responsible for enforcement of the Health Insurance Portability and Accountability Act of 1996 (HIPAA) against covered entities. Outside of the regulated industries context, the Federal Trade Commission (FTC) is the primary federal privacy regulator in the US.
The European Union EU differs fundamentally from the US in the way it handles the issue of personal data. Protection of personal data and respect for private life are important fundamental rights, enshrined in Article 16 of the TFEU, as well as Articles 7 and 8 of the EU Charter of Fundamental Rights, which recognise respect for private life and protection of personal data as closely related but separate fundamental rights.
Under EU law, personal data can only be gathered legally under strict conditions, for a legitimate purpose. Furthermore, persons or organisations which collect and manage your personal information must protect it from misuse and must respect certain rights of the data owners which are guaranteed by EU law.
The EU's Data Protection Directive also foresees specific rules for the transfer of personal data outside the EU to ensure the best possible protection of your data when it is exported abroad.
The Regulation on the protection of individuals with regard to the processing of personal data by EU institutions establishes a European Data Protection Supervisor (EDPS). This is an independent EU body responsible for monitoring the application of data protection rules within European Institutions and for investigating complaints. National Data protection Authorities are established in all 28 Member States.
5. Illegal content and copyright
5.1 Presence and treatment of illegal content on online platforms (evidence)
5.2 Presence and treatment of pirated content on platforms (evidence) Technology has developed significantly: YouTube content ID
5.3 Existing regulatory framework and its enforcement
- InfoSoc Directive
- Ecommere Directive
5.4 Conclusion
- need to harmonize the Notice & Action procedure,
- clarify concepts in ECD based on ECJ rulings: “actual knowledge”, “hosting, mere conduit, caching”
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6. Cybersecurity Also, the European Union has recently reached agreement on the first EU-wide legislation in the field of cybersecurity in which the important role played by certain platforms in the online world is explicitly recognised. Indeed, subject to these rules, app stores, search engines and cloud service providers will be designated as important "digital service providers (DSPs)" and thus be subject to certain specific cybersecurity rules.230
7. Other horizontal priorities (which and why these?)
8. Sectoral priorities (model analysis based on the media sector [safe outside of the collaborative economy area dominated by GROW], what else?)
Annexes
I. Synopsis report on public consultation results
II. Report on Eurobarometer results
III. JRC Study
IV. List of expert workshops: JRC, EPSC hearings etc
230 European Commission press release of 8 December 2015, available at: http://europa.eu/rapid/press-release_IP- 15-6270_en.htm [accessed at December 2015].
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