"Big Data" in Online Platform Competition
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THE ROLE OF “BIG DATA” IN ONLINE PLATFORM COMPETITION Andres V. Lerner1 August 26, 2014 1 Executive Vice President, Compass Lexecon. I am grateful to Emmett Dacey and Janin Wimer for excellent research assistance and to Google, Inc. for research support. The views expressed in this article are solely those of the author. 1 | Page Electronic copy available at: http://ssrn.com/abstract=2482780 TABLE OF CONTENTS I. Introduction ............................................................................................................................. 3 II. The Collection of User Data by Online Providers is a Common and Important Part of the Competitive Process ................................................................................................ 7 A. The collection of customer data is widespread ............................................................. 7 1. The collection of user data by online providers ...................................................... 7 2. The collection of customer data by offline firms .................................................... 9 B. Procompetitive rationales for the collection of user data by online providers ............ 10 1. User data allows online providers to improve the quality of services .................. 10 2. User data allows online providers to monetize effectively and thereby offer services at lower (often zero) prices to users ........................................................ 12 III. The Collection of User Data Does Not Lead to the Entrenchment of Dominant Online Platforms .............................................................................................................. 19 A. Foreclosure of rivals through the collection of user data is highly unlikely ............... 20 1. User data is non-rivalrous and incumbent online providers do not have (explicit or de facto) exclusivity over user data .................................................... 21 2. No one firm controls all, most, or even a significant share of user data ............... 23 B. Competitive success of online platforms is driven by much more than the amount of user data collected ................................................................................................... 27 C. Because of rapidly diminishing returns to user data, any advantages of scale generally weaken or even disappear at a low level ..................................................... 35 1. Diminishing returns in the provision of user services ........................................... 35 2. Diminishing returns in monetization ..................................................................... 39 IV. Online Markets Have Not “Tipped” to Dominant Online Platforms ........................... 46 A. There is no evidence that online markets have tipped to dominant platforms ............ 46 B. Platform differentiation reduces the propensity to tip to a dominant platform ........... 53 C. Multi-sided network effects do not reinforce tipping to a dominant platform ............ 56 1. Multi-sided network effects for advertisers are limited ........................................ 58 2. Multi-sided network effects for users are weak or nonexistent ............................ 60 V. Conclusions .......................................................................................................................... 62 2 | Page Electronic copy available at: http://ssrn.com/abstract=2482780 I. Introduction 1. The collection of user data by providers of online services such as Facebook, Microsoft, Yahoo!, Apple, Amazon, and Google recently has become a popular topic in debates about the application of competition policy to online markets.2 At issue is whether the collection of large amounts of data—sometimes referred to as “big data”—and in particular, data collected from users, can lead to markets “tipping” to dominant online platforms and, as a result, whether such markets merit earlier and more aggressive antitrust intervention.3 2. Arguments that the potential for the collection of user data to create insurmountable entry barriers are based on the assumption that online providers need a large base of users from whom to collect data, and large amounts of user data in order to offer valuable services and compete effectively for users. This “feedback loop” is presumed to lead to significant economies of scale and to the entrenchment of dominant platforms in markets for online services.4 Proponents of greater antitrust intervention in online markets claim that “big data,” particularly data from users, is the “oil” of the new online economy, and that this essential input is increasingly controlled by a handful of dominant players.5 In turn, it is argued that because dominant online platforms face insufficient competitive constraints, they are likely to collect more and more data from each user, and more sensitive personal data, and/or to undercompensate users for the value of the data they contribute—i.e., provide insufficient services for free relative to the value of user data collected. 2 See, e.g., Nathan Newman, “Search, Antitrust and the Economics of the Control of User Data,” working paper, NYU Information Law Institute. Nathan Newman is the Microsoft Research Fellow of the Information Law Institute at New York University, last revised August 14, 2014. See also, “Privacy and competitiveness in the age of big data: The interplay between data protection, competition law and consumer protection in the Digital Economy,” Preliminary Opinion of the European Data Protection Supervisor, March 2014, available at https://secure.edps.europa.eu/EDPSWEB/webdav/site/mySite/shared/Documents/Consultation/Opinions/2014/14- 03-26_competitition_law_big_data_EN.pdf. 3 See, e.g., Nathan Newman, “Search, Antitrust and the Economics of the Control of User Data,” working paper, NYU Information Law Institute, last revised August 14, 2014, p. 6: “depending on the market to correct monopoly dominance in such sectors is a poor strategy and why government intervention is needed, and needed at an earlier point than conventionally understood.” 4 The European Data Protection Supervisor stated that “[t]he collection and control of massive amounts of personal data are a source of market power for the biggest players in the global market for internet services.” (“Privacy and competitiveness in the age of big data,” European Data Protection Supervisor - EDPS/2014/06, March 26, 2014, available at http://europa.eu/rapid/press-release_EDPS-14-6_en.htm?locale=en.) 5 Nathan Newman, “Search, Antitrust and the Economics of the Control of User Data,” working paper, NYU Information Law Institute, last revised August 14, 2014, pp. 3-4: “The rise of ‘big data’ as it’s sometimes labeled means that control of information, deemed the ‘new oil’ of the information economy, is skewed towards a few players with both the concentrated data processing power and supply of user data to dominate a particular sector.” 3 | Page Senator Al Franken summarized this position, stating that “when companies become so dominant that they can violate their users’ privacy without worrying about market pressure, all that’s left is the incentive to get more and more information about you.”6 On the advertiser side, it is asserted that the collection of large volumes of user data, and the utilization of such data to target advertisements to users, leads to higher advertising rates, which are passed on to consumers in higher prices for goods and services. 3. In this article, I explore assumptions behind calls for greater antitrust scrutiny of the collection of user data by online platforms, and proposals for more aggressive antitrust intervention in such markets. The primary conclusion is that claims that collection of user data creates significant economies of scale, and thereby leads to the entrenchment of dominant online platforms, are unsupported by real-world evidence. Naked assertions regarding the role of user data in online platform competition regrettably have replaced a careful and meaningful analysis of competition in online markets. 4. User data is a valuable input into the provision of online services. Online providers collect user data in order to improve the services offered to users, and to monetize those services effectively through targeted advertising, which leads to valuable services being offered to users at subsidized prices, often for free. As a result, the collection of user data by online providers is an important part of the competitive process and generates sizable consumer benefits. Because of these competitive benefits, virtually all online providers collect data from users (from tracking user activity on their own sites, “data brokers,” and various other sources) in order to improve and monetize their services. The collection and use of customer data is commonplace not only for online firms, but for traditional offline (“brick-and-mortar”) businesses. The collection of user data is conducted by firms of all sizes, by firms offering a wide array of services to users, and by both new entrants and established players. 5. Although the collection of user data is generally valuable for online providers, the conclusion that such benefits of user data lead to significant returns to scale and to the entrenchment of dominant online platforms is based on unsupported assumptions. Although, in theory, control of an “essential” input can lead to the exclusion of rivals, a careful analysis of 6 Al Franken, “How Privacy Has Become an Antitrust Issue,” Huffington Post,