Distinguishing between "platforms" and "aggregators" in competition law

There's a lot of political will to regulate the Big Tech companies in both the US and the EU at the moment, which is a very welcome juncture to have arrived at after 40 years of antitrust inaction during which companies were permitted to grow by buying nascent competitors, merging with major competitors and cornering vertical markets -- all classic anticompetitive behaviors that Reagan and his successors legalized.

But regulating Big Tech isn't enough: we have to regulate them effectively. The wrong rules (like the EU's Copyright Directive) can simply cement their dominance. And, of course, we want to take care to extinguish only bad, anticompetitive behaviors, not those that give rise to the parts of tech that we love and value.

Veteran tech analyst Ben Thompson wrote an essay to accompany a talk he's giving at the Antitrust in Times of Upheaval conference, in which he tries to cleave tech monopolists into two different categories: "platforms" ("a foundation on which entire ecosystems are built") and "aggregators" ("collect a critical mass of users and leverage access to those users to extract value from suppliers").

Thompson proposes that platforms and aggregators have different failure modes when it comes to anticompetitive action, and that each should be regulated differently.

Platforms (like Apple's App Store or Microsoft Windows), have enormous power over third parties. If you get kicked out of the App Store, you can no longer sell to Iphone owners, so Apple has lots of opportunities for rent-extraction from its software vendors, like forcing them to use its own payment processor. They can also tie their platforms to unrelated products and services, as Microsoft did when it included Internet Explorer with Windows. Platforms can also "self-deal" by giving preference to their own services over third parties (Microsoft only allows for realtime Office doc co-authoring if you're using their proprietary cloud service).

Aggregators (like Google and Facebook) help users and third parties find each other, and while they can be capricious in who they exclude or downrank, anyone so excluded can rely on rival aggregators to connect with users. Aggregators can charge for premium placement, but if someone doesn't want to pay for top placement, they can turn to a rival. Aggregators can use "tying" to extract rents from third parties -- say, by forcing travel agents to pay for inclusion in a Google Travel product, and aggregators can "self-deal" by giving preference to their own products (like Google's shopping links).

Thompson says that platforms are important to society: "they create the possibility for products that never existed previously, and are the foundation for huge amounts of innovation" so there should "be more and larger platforms, not fewer and smaller." But platforms can be abusive, so "regulators should simultaneously encourage the formation of new platforms while ensuring those platforms do not abuse their position."

That means that platforms should have a relatively free hand to buy or merge with competitors, but should face "significant scrutiny in terms of vertical foreclosure, rent-seeking, bundling, and self-dealing."

But for Thompson, aggregators are much more suspect because "the incentives are warped from the beginning" -- they incentivize third parties to make themselves attractive to the aggregator, not users (think of search-engine optimization). Because aggregators derive their power from "controlling demand," regulators should subject mergers and acquisitions by regulators to "extreme skepticism," but should not concern themselves overmuch with how the aggregator runs its business, because in a competitive market, "users and third parties can always go elsewhere, and if they don’t, that is because they are satisfied."

Thompson uses Facebook as an example: if the company had been prohibited from buying Whatsapp and Instagram, Facebook's stupid policies wouldn't matter so much, because users who left for those rivals would take with them a lesson about what their priorities were, and the competitors could shift their policies to meet them.

There is one final component to this analysis: if platforms and Aggregators are to be treated differently, regulators need a more flexible way of considering when is the correct time to step in.

Consider the three regulatory issues that I implicitly suggested deserve more attention in this piece: Apple’s App Store policies, Facebook’s acquisitions, and Google’s third-party advertising offerings. None of them fit under a popular conception of a monopoly: Apple sells a minority of smart phones, Facebook acquired Instagram when it had only 30 million users, and the advertising market is both not consumer-facing and has infinite supply.

That doesn’t mean harms don’t exist, though: the apps and services that aren’t created, the advertising-based consumer services that are under-monetized (Snapchat and Twitter) or that aren’t even being funded, and the multitude of websites that can’t realistically even try innovations that entail going around Google.

A Framework for Regulating Competition on the Internet [Ben Thompson/Stratechery]

(via Four Short Links)