Digital platforms have become very powerful players globally, but what defines them? They seem to share certain features with states and markets, but they have to be distinguished from both. Governments and societies worldwide struggle to understand what platforms are and need to think about the rules and regulations that will be required in the future.
Networks change the architecture of the global order.
In order to help people who suffered from hurricane Irma, Tesla remotely upgraded the software of its vehicles and increased the battery duration so that people could get out of the area. Tesla cars can thus be upgraded like computers.
Amazon’s acquisition of Whole Foods negatively affected the stocks of supermarket retailers without having a proven effect on market shares.
LIKE STATES, PLATFORMS ARE ORGANIZED CENTRALLY, BUT LIKE MARKETS, THEY FACILITATE DECENTRALIZED INTERACTION.
According to Ben Thompson’s Aggregation Theory, the Internet fundamentally alters markets. Previously, the limited amount of suppliers versus consumers and high delivery costs gave distributors who controlled supply lines an advantage. Consumers came second.
The Internet, however, evaporates distribution and transaction costs and undermines the advantage of distributors. By contrast, aggregators can easily bring together all suppliers and the focus shifts towards the user experience. This is the model that distinguishes companies such as Google, Amazon, Netflix, and Uber from incumbents.
Much is being written about the power of Big Tech as several large Silicon Valley companies approximate monopolistic control. These companies are platforms, but what exactly is a platform? Specifically, what type of organization is it?
Platforms can be compared to both states and markets. Like states, they are organized centrally, but like markets, they facilitate decentralized interaction. Until recently, a key argument against centrally controlled economies (like the socialist model) was that they could not gather all the decentralized information necessary for efficient allocation. Platforms, on the other hand, use this distributed information while simultaneously centralizing data collection and revenues. This makes them such a powerful phenomenon.
Platforms differ from traditional markets as well. In particular, they influence three elements: the product, the consumer, and the relationship between the two. In the physical world, companies produce finished end products with limited applications. On the Internet, no good or service that is delivered is ever an end product. Behind the interface that shows us a Facebook wall, a Netflix series or a map on Google, every piece of information can always become the resource for another program or layer of intelligence. On the Internet, there are only “semi-finished products”, even when they involve taxi rides or housing spaces.
Second, Internet platforms transform consumers into “users”. Whereas previously consumers “consummated” goods or the goods became waste, users, on the other hand, remain connected to platforms. In contrast with the consumption of the DVD, Netflix remains present when the user watches a series. Google learns from the maps we use. More specifically, the user becomes part of the product as companies like Google or Netflix change their offering based on the user profile.
This different “relationship based on data” is the third aspect of the way in which platforms transform markets. As Thompson argues, aggregating supply is no longer key to competitive advantage. Providing the best user experience shifts the focus of companies towards gathering user data in order to continuously improve that experience.
In states we are citizens and in markets we are consumers, but on platforms we are users. To protect citizens and consumers, there exist elaborate codes of rules and rights. As the power of global platforms becomes increasingly clear, we will have to think about rules and rights in this new social domain.