The dark side of the platform economy
Channel control, predatory contracting, vertical integration, and the 'God View'
This edition of the newsletter is packed with issues that come up when BigTech platforms engage in anti-competitive behaviour against players, both within their ecosystem and outside it.
This edition looks at various scenarios where platforms engage in anti-competitive behaviour, including the following:
Monopolistic channel control, e.g. Apple vs. Spotify
Vertical integration into complements, e.g. Sonos vs. Google
Predatory contracting, e.g. Amazon vs. merchants
The ‘God view’, e.g. Facebook Onavo
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CHANNEL CONTROL AND THE APPLE TAX:
WHEN PLATFORMS COMPETE ACROSS INDUSTRIES
When a platform owner also acts as a producer on its own platform, there’s a conflict of interest.
This gets especially complex when the platform player has interests across industries. Consider Apple. In the music industry, Apple competes with Spotify. But as an App Store owner, Apple acts as a channel for Spotify. This allows Apple to attack Spotify through its channel ownership, towards the advantage of its music business.
This article presents an interesting set of issues between Apple and Spotify.
Conflict of interest: Platform-producer competition and the Apple Tax on Spotify
Remember handset manufacturers boycotting Symbian as Nokia gained greater control of the platform? Apple is far from a neutral platform in its relationship with Spotify, given the importance of music as a category for Apple. It leverages its distribution control points to levy taxes and restrictions on Spotify, to Apple Music's advantage.
Money quote: "Apple takes a 30-percent cut on every Spotify subscription signed up via the App Store during the first year, and then 15 percent each year thereafter. “If we pay this tax, it would force us to artificially inflate the price of our Premium membership well above the price of Apple Music,” said Ek in a March blog post. Conversely, not paying the tax results in “a series of technical and experience-limiting restrictions on Spotify,” complains Ek, such as limiting communications with Spotify customers. Spotify’s complaint says that Apple unfairly targets music subscriptions with the tax but not apps like Uber or Deliveroo, for example."
This price discrimination of sorts isn’t aimed merely at revenue maximisation. It serves to choke competition by attacking their margins on Apple’s controlled channel.
SONOS VS. GOOGLE
WHEN PLATFORMS VERTICALLY INTEGRATE
Another set of issues emerge when platforms vertically integrate and gain control of certain parts of the value network.
The Sonos vs Google lawsuit is a classic example of the ecosystem conflicts that emerge when platform firms vertically integrate into non-platform positions in the ecosystem.
Platform and non-platform positions: Understanding Google vs. Sonos
Google plays at the platform layer with Google Assistant, as well as the device layer with Google Home. This allows Google to use its interface ownership with Assistant to engage in anticompetitive moves at other layers.
(The final straw) was Google using its Assistant voice command platform as a cudgel. Voice commands have become a standard feature on speakers, and Google Assistant is one of the most ubiquitous. While the company offers a free software development kit, it’s restricted to non-commercial use. That gives Google a lot of power over hardware makers, and Google may have used it to retaliate against Sonos. One anecdote suggests Google set stricter terms for using Assistant, for example, after receiving complaints about the patents.
Google also uses its control position with Assistant to discourage multihoming in its ecosystem.
Sonos wanted to roll out simultaneous support for Google Assistant and Amazon Alexa — an extra feature that would justify a higher price and set Sonos apart. But Google and Amazon reportedly forced Sonos to drop the plan. (Amazon denies that it did so.) Sonos executives claim that Google maintains a standing ban on Assistant working alongside any competing product from Amazon, Apple, Microsoft, or Baidu.
Google Assistant is an important control layer in the smart home ecosystem. A platform vertically integrating into another position in the ecosystem, in a way that limits fair competition, is one of the few instances where I believe the idea of breaking up big tech is justified.
PREDATORY CONTRACTING
GOING ANTI-COMPETITIVE OUTSIDE THE ECOSYSTEM
Another way platforms dominate over smaller firms in their ecosystem is through predatory contracting.
I’ve written about this in detail before in this article.
As platforms gain dominance, they often demand “preferred customer” clauses from their ecosystem partners.
First, when a platform starts to dominate the market, it can raise the fees it charges sellers. A dominant platform can do so without the fear of destroying the network effect. An up-and-coming platform is less likely to do so. Sellers aren’t left with much choice in such cases.
And the classic bait-and-switch move depending on which side of the network effect you are on.
Platforms often bait and switch in this manner. They attract the ecosystem with lower fees and deeper incentives when network effects are low. As the ecosystem builds around the platform, network effects increase and the platform starts moving towards winner-take-all. The dominant platform can work against the interests of its partners without fear of destroying the network effect.
Predatory contracting also eventually kills competition.
Consider a new platform that launches and wants to attract partners by offering them better economic terms than the dominant platform. These could involve lower selling fees or other subsidies like free promotions. These terms, in turn, may encourage sellers to reduce prices on the new platform. In such a case, the dominant platform can once again leverage the preferred customer clause and force sellers to offer the same lower prices. However, it is under no obligation to give sellers the better economics they enjoy on the new platform. As a result, sellers are hesitant to join the new platform because any price reduction on it, when mirrored on the dominant platform, would translate to lower margins for them. Thus sellers go on with the dominant platform and the new platform never takes off.
THE ‘GOD VIEW’
This term got popularised by Uber but every platform has an all-knowing view on interactions in its ecosystem that it facilitates.
A ‘God View’ clearly comes laced with privacy concerns. But having an all-knowing view of ecosystem activity also raises concerns around the platform engaging in anti-competitive moves using this knowledge. I’m, of course, using the term much more broadly than just referring to a specific Uber-style tool.
A ‘God View’ gives the platform an unfair advantage over other producers in the ecosystem. We’ve seen this play out in the past (Nokia vs. other handset manufacturers on Symbian) and continue to see it on several platforms today (Amazon vs. merchants on the Amazon Marketplace).
Some platforms may use the ‘God View’ to work against producers. If the producers are small and fragmented, they have little choice, but if they are large and well organized, they can abandon the platform and collude off it with a (relatively) independent player.
HOW THE BIG4 USE THEIR ‘GOD VIEW’
How the Big 4 Tech firms use their 'God View' to kill competition
This article offers a quick overview of anti-competitive moves by the big 4 tech firms. It fundamentally comes down to the 'God View', originally a term used by Uber, which can be extended to imply the all-knowing visibility and insight that a platform has over the market.
UNDERSTANDING ONAVO
FACEBOOK’S ‘GOD VIEW’
Facebook takes it a step further when building a ‘God View’. Facebook's app Onavo directly informed its acquisition of Whatsapp. A few interesting snippets from the article linked above:
"Among the apps Facebook distributed was a VPN called Onavo Protect. The VPN billed itself to users as a way to keep data private by encrypting it—basically, what a VPN is for. However, The Wall Street Journal reported in 2017 that when users opened an app or website, Onavo was redirecting the traffic through Facebook servers, which logged the data. That data directly informed Facebook's largest-ever acquisition, the WSJ reported: its $19 billion purchase of messaging platform WhatsApp in 2014. "Onavo showed [WhatsApp] was installed on 99% of all Android phones in Spain—showing WhatsApp was changing how an entire country communicated," sources told the WSJ."
And here's what happens if you reject Facebook's acquisition efforts:
"Instagram influencers with verified accounts were reportedly warned that mentioning Snap could cost them their coveted blue check mark. Snap executives also suspected Facebook was suppressing content that originated on Snap from trending on Instagram."
BACK TO… APPLE vs. SPOTIFY
Apple's God View:
"Apple has a history of using App Store sales data as something of a free focus group for its own development team... uses App Store sales and download data to see which third-party apps gain the most popularity with iPhone users. Apple can then develop a similar app or feature set in-house and distribute it as part of iOS, or the company can promote it more heavily as a native Apple program."
Apple uses its platform dominance with App Store search to also work against competing producers.
On Spotify again:
" In September 2013, Spotify was the first result returned by searches for "music." By June 2016, Apple Music was the first result, and Spotify was down to fourth place—arguably, something that could have happened naturally. By February 2018, though, Apple first-party apps were suddenly the first six results for "music," with Spotify coming in at number eight. And by December 2018, Apple native apps came back as the first eight results in the same search, even though some were completely unrelated to music—and Spotify, one of the world's most popular music streaming services, was all the way down to 23."
Google and Amazon have similarly used their control over search and recommendation to participate profitably in interesting niches and demote competitors.
The common thread across all these moves is the information advantage that platforms possess on account of convening the market. Many of today’s anti-competitive moves come up because of this information advantage.
Producers looking to join a platform need to carefully evaluate platform positions and identify potential conflicts of interest that may come up because of the platform’s information advantage.