Regulating Digital Platforms: A case against treating platforms as utilities
By Vaishnavi Prasad
Over the past decade, digital platforms have grown exponentially and their role has evolved from being a facilitator or intermediary to a service. Digital platforms have transformed the way individuals interact with each other, consume and engage with news, and access goods and services. It has been argued that the role of digital platforms is now akin to that of a public utility and therefore, must be subject to a public utility style of regulation. Here, the State has the authority to set the rates charged by the utility, exercises oversight over the service and its quality, controls market entry and the internal operations of these utilities.
This serves the broad ends of checking the monopolization of platforms, promoting net neutrality, providing real choice for the consumers and ensuring that digital rights are secured. Some literature argues that platforms such as Google, Facebook and Amazon cause the corporatization of social commons and the threats of privatizing public goods must be mitigated by regulating them as one would, a utility. Further, utility-like regulation may be able to protect user-privacy and secure their digital rights.
However, this line of argument has faced considerable criticism. In the past, public utility regulation has hindered innovation and competition. For instance, in 2013, several economists approached the Federal Communications Commission and stated that the public utilities style of regulating the communications market is harming innovation in the sector. It is likely to facilitate the creation of natural monopolies, and any proposals to create Application Programming Interface (API) neutrality on integrated information platforms will threaten investment and growth.
API neutrality is applying the principles of net neutrality to the application stage by ensuring that entities who offer APIs remain application-neutral i.e. every competitor can use the API on an equal setting. Further, it is important to acknowledge the difference between digital platforms and utilities in their core features and how they operate. In this article, I compare public utilities in India and digital platforms on the metrics of value creation, monetization, scarcity of resources and ease of entering the market and argue why the regulatory approach of the Indian State cannot reasonably be applied to digital platforms.
Driver 1: Value creation
A digital platform can create value by its role as a platform for transactions where it brings together consumers, businesses and advertisers. This is done through targeted online advertising by Google and Facebook, operating e-commerce platforms like Amazon, Swiggy and Nykaa, and renting out cloud services like Amazon Web Services and Tent. Digital platforms also create value by providing opportunities for users to engage with each other and are a source of valuable data which can be collected, stored and analyzed. For example, social media platforms such as Tiktok and Twitter and any of the apps present in app stores allow for the interaction of individuals and third parties. The ability to create value on a platform depends on the ability to build network effects and foster an ecosystem of interconnected third parties who facilitate this value creation.
However, value creation in traditional public utilities is different. They provide products with standardized features through certain infrastructure. Let us examine this with the example of the Gas and Oil industries. Value creation in the oil and gas industry directly depends on the available capital and how it is allocated, a factor not as relevant in value-creation in digital platforms. Technologies are employed to extract oil and gas, a source of value in itself, which is then monetized. Therefore, regulating this utility involves controlling access to this source of value in the form of licensing and investments.
Until 1999, the Government of India had a monopoly over the oil and gas, following which it adopted the New Exploration Licensing Policy where companies were allowed to bid to explore hydrocarbons. While public sector enterprises, the ONGC, and Oil India Ltd. contribute to 71.5% production, private and joint venture companies produce the remaining. The increasing demand of oil and gas has led to the Government exercising its authority to control the investments made in this sector and adopting 100% Foreign Direct Investment However, it is not reasonable to apply this form of regulation to digital platforms, owing to its ubiquitous nature of value creation.
Driver 2: Monetization
Contrary to traditional linear economies where the manufacturers control the value from the raw material to the end product (For example, a car manufacturer controls the value chain from the first metal procurement to the final authorized dealer), digital platforms paved the way for multi-sided economies. A multi-sided market is a platform that creates value by enabling the interaction between multiple entities, otherwise known as network effects. There are several means of monetization on digital platforms: admission fees, transaction fees, arbitrage, data monetization, membership fee, freemium, and service and product sales fee. The price is determined on the basis of the network effects and respective demand elasticity of different market entities. There is no standardization of pricing.
Public utilities use similar means of pricing such as monthly subscription models and per-use charges. For instance, the electricity sector in India uses the Availability Based Tariff, which is a frequency based pricing scheme. Prior to the introduction of the Availability Based Tariff [ABT], Generation Stations used to deliver the same amount of MegaWatts irrespective of whether there was a lower or a higher power demand, This, in turn, used to affect the grid frequency and cause disturbance. ABT is a three part pricing scheme i.e. fixed charge, variable charge and unschedule power interchange incentive/penalty. The fixed cost is imposed on beneficiaries in proportion to their entitled power from the Generation Station, the variable charge is the cost incurred to produce the MegaWatts and the Unscheduled Interchange Charge is any deviation from the scheduled generation by the plant or supply to the beneficiary. There is a standardized pricing chart when supplying electricity to domestic consumers as well as large industries in the form of paise/kWh.
Electricity regulation in India involves the Government regulating tariff rates to make them competitive, waiving transmission charges and losses, and promoting value creation. Conventional utilities are characterized by pre-determined rates and standardized pricing and this is incompatible with digital platforms which depend on network effects where several means of monetization can be exercised.
Driver 3: Scarcity of Resources
Another fundamental difference between digital platforms and most conventional public utilities is that regulation does not stem from the fact that there is scarcity of resources. For example, spectrum is a scarce resource in the telecom sector. Therefore, there is an auctioning and allocating process in place for spectrum. The Telecom Regulatory Authority of India allocates licenses to provide mobile access services in India and levies a Spectrum Usage Charge on the same, along with other license fees. They also promote spectrum sharing to enhance the spectral efficiency of the holding by two licensees.
Therefore, the regulatory role of the TRAI is largely centred around resource allocation and management. However, digital platforms face no such scarcity. While they do require electricity, hardware, software and broadband networks to exist in the first place, these factors do not directly impact the quantity of digital platforms. The internet is a seemingly infinite space that allows for value to be created via these platforms without the corresponding depletion of resources that could potentially lead to scarcity.
Driver 4: Ease of entering the market
In order to enter the market, a digital platform simply requires sufficient traction from consumers and sellers/advertisers such that its services can be monetized. Users and businesses place more value on platforms with a larger number of participants with whom they can interact. While this is certainly relevant for platforms such as Zomato and Uber which need to be operational on a large scale to compete in the market, it also permits small scale entries for niche user bases. For instance, Lokal is a location-based app for hyperlocal updates and interactions, and Roposo is a social media platform available only in vernacular languages such as Hindi, Marathi, Tamil etc.
Further, digital platforms provide the opportunity of multihoming where consumers adopt multiple platforms with similar services. For example, while Netflix, Hotstar and PrimeVideo provide the same service as OTT platforms, people often subscribe to more than one of these platforms. This applies to services such as Ola and Uber, or Swiggy, Zomato and Dunzo as well.
In contrast to this, traditional utilities such as Ports or Civil Aviation require a considerable amount of investment to enter the market which inevitably leads to the market being dominated by a few large, key players. In order to prevent predatory monopolistic practices, the Government intervenes in pricing. For instance, the Ministry of Civil Aviation has recommended an indicative airfare of Rs. 2500 per passenger for a distance of 500–600km. Further, the services provided in these utilities are often interchangeable and not distinctive. Therefore, they provide for single homing by users.
The fundamental nature of digital platforms is different to that of public utilities which makes utility-type regulation of the same incompatible. Instead, regulation that involves less interference and control by the Government may be employed. This can be in the form of disclosure policies which reveal to social media users exactly what data is being collected, in a manner that is accessible to them. This must necessarily be followed up with vesting the user more control over the kind of data being collected through cookie controls and ads preference managers, and also provide them the option of blocking data collection altogether. Interoperability allows consumers to use their social media data and facilities across different platforms. Promoting interoperability is an essential step towards checking monopolization of platforms.