GSR-16 Discussion paper THE RACE FOR SCALE: MARKET POWER, REGULATION AND THE APP ECONOMY Work in progress, for discussion purposes Comments are welcome! Please send your comments on this paper at: [email protected] by 30 May 2016 The views expressed in this paper are those of the author and do not necessarily reflect the opinions of ITU or its Membership. CONTENTS 1 EXECUTIVE SUMMARY ........................................................................................... 5 2 BACKGROUND AND DEFINITION ............................................................................. 11 2.1 What is the app economy? ............................................................................................... 11 2.2 Defining the app economy and its ecosystem ................................................................... 14 3 THE APP ECONOMY VALUE CHAIN AND THE GLOBALISATION OF APP DEVELOPMENT . 18 3.1 The structure of the app economy .................................................................................... 18 4 THE ECONOMICS OF DISRUPTION ........................................................................... 26 4.1 Transactions costs ............................................................................................................. 26 4.2 Modes of digital disruption ............................................................................................... 27 4.3 Potential benefits of app disruption .................................................................................. 31 4.4 The race for scale and the future of market power .......................................................... 33 5 MEASURING THE BROAD ECONOMIC IMPACTS OF THE APP ECONOMY...................... 38 5.1 What is the significance of the app economy?.................................................................. 38 5.2 ICT disruption is wide-spread and ongoing: apps accelerate the process ......................... 38 5.3 The productivity paradox .................................................................................................. 40 5.4 Challenging traditional industry structures and definitions .............................................. 42 5.5 The Value Chain and Consumer Surplus Method .............................................................. 43 5.6 Capital Value Method ........................................................................................................ 47 5.7 Productivity Method ......................................................................................................... 48 5.8 Value of time method ....................................................................................................... 49 5.9 Commentary on potential measurement methodologies ................................................. 50 6 REGULATING THE APP ECONOMY ......................................................................... 51 6.1 Introduction ...................................................................................................................... 51 6.2 Preconditions for the development of platforms .............................................................. 53 6.3 Addressing Government, regulator and key stakeholders ................................................ 54 6.4 The debate on optimal regulatory approaches ................................................................. 55 6.5 Exploring key regulatory questions for the ICT sector ....................................................... 58 6.6 Recommended approaches to regulation of the app economy ........................................ 70 7 APPENDIX A: DATA FOR THE APP ECONOMY ........................................................... 72 7.1 Comparative global data ................................................................................................... 72 7.2 Europe ............................................................................................................................... 74 7.3 USA .................................................................................................................................... 77 7.4 Canada .............................................................................................................................. 80 7.5 India .................................................................................................................................. 82 2 | P a g e 7.6 Australia ............................................................................................................................ 84 7.7 Indonesia ........................................................................................................................... 87 7.8 Belarus .............................................................................................................................. 88 7.9 Brazil .................................................................................................................................. 89 8 APPENDIX B: THE LARGE APP ECONOMY PLAYERS ................................................ 90 8.1 Introduction ...................................................................................................................... 90 8.2 Global Market Titans ......................................................................................................... 90 8.3 Market disrupters .............................................................................................................. 91 8.4 Regional Market Exemplars ............................................................................................... 92 8.5 Conclusions related to the case studies ............................................................................ 92 APPENDIX C: OECD BASE EROSION AND PROFIT SHARING (‘BEPS’) REFORMS .............. 93 A.1 Introduction ...................................................................................................................... 93 A.2 Background ....................................................................................................................... 93 A.3 The Project ........................................................................................................................ 94 A.4 Final recommendations ..................................................................................................... 94 A.5 Digital economy-specific recommendations ..................................................................... 95 9 APPENDIX D: COMPANY CASE STUDIES ................................................................ 96 B.1 Introduction ...................................................................................................................... 96 B.2 Airbnb ................................................................................................................................ 96 B.3 Alibaba .............................................................................................................................. 97 B.4 Apple ................................................................................................................................. 99 B.5 Facebook ......................................................................................................................... 100 B.6 Flipkart ............................................................................................................................ 102 B.7 Google ............................................................................................................................. 103 B.8 iSignthis ........................................................................................................................... 104 B.9 LINE ................................................................................................................................. 105 B.10 Netflix .............................................................................................................................. 106 B.11 Skype .............................................................................................................................. 108 B.12 SocietyOne ..................................................................................................................... 110 B.13 Tencent .......................................................................................................................... 111 B.14 Uber ............................................................................................................................... 112 3 | P a g e This report was prepared by ITU experts Mr Simon Molloy of System Knowledge Concepts and Mr Scott W. Minehane of Windsor Place Consulting, with significant inputs from Mr Barry Burgan, Associate Dean of Bond Business School, Bond University, Gold Coast, Australia, under the direction of the ITU/BDT Regulatory and Market Environment Division. Significant assistance was also provided by Ms Sofie Maddens, Ms Carmen Prado-Wagner and Ms Youlia Lozanova of ITU. For this paper, the ITU experts gratefully acknowledge the assistance of a range of industry commentators. Mr Minehane also acknowledges the research undertaken of his staff at Windsor Place Consulting (www.windsor-place.com), including specifically Mr Sam Keogh, and Ms Anthea McGurty. Amazon’s 280,000-squarefoot fulfillment center in Hyderabad. Photograph by Benjamin Lowy for Fortune Magazine (see http://fortune.com/amazon-india-jeff-bezos/) 4 | P a g e 1 EXECUTIVE SUMMARY THE BIRTH OF THE APP ECONOMY On 9 January 2007,