It’s an everyday thing at this point. Amazon abused its position as a platform to use third party seller data to compete against them. Apple abuses its position as an application platform to compete with Spotify and other streaming services. YouTube abuses its position as a video platform banning content producers without offering any recourse. The list goes on.
In a more traditional business, such as a factory, you have a set of suppliers that sell you goods you need, like steel and machinery. There is a power dynamic between suppliers and purchasers. If there are few suppliers, they get to charge more because buyers don’t have much choice. If you are running a big factory and purchasing lots of steel, you can negotiate better prices with steel suppliers than if you were running a smaller factory, for example.
For platform businesses, users trying to make money in the platform can be thought of as suppliers. Those would be Amazon third party sellers, YouTube video producers or companies selling apps the the app store, for example.
A similar power dynamic exists between platform businesses and their supplier-users. But in this scenario the suppliers are generally so much smaller and replaceable that they have close to no leverage at all. Some bigger players can get better deals from platform owners, but that is a tiny fraction of the platform suppliers.
For the average app developer out there, if they don’t like the app store terms of service, their only alternative is to give up selling their product to almost half of the smartphone market. There is no negotiation, they are just too small for Apple to care.
Consumers are not directly harmed when suppliers are abused, so they stay on the platform. In fact, consumers sometimes even benefit from this supplier abuse in the form of lower prices. Suppliers have no meaningful alternative, so they have to endure it. As the platform grows bigger, this leverage imbalance increases proportionally.
So what is the problem then? Consumers are not harmed, sounds like a free market working as expected, doesn’t it? Not quite.
Think of full time content producers in a platform like YouTube: The platform is frequently their main or even only source of income. They frequently don’t have any other platform to get income from – YouTube is almost completely dominant in the video space. Going to another platform could greatly reduce their revenue.
Content producers in a platform are subject to the economics of being a supplier, but in many ways they are also quite similar to employees. I am not suggesting YouTubers or app store sellers should be treated as employees. But treating them as suppliers also assumes they’re in a position where they have alternatives and negotiation leverage that they don’t.
We need regulation to control abuse from platform owners to ensure competition and innovation can continue to happen and thrive inside platforms.
Is regulation really the solution?
Regulation should always be treated as a last resort. It is too easy to get it wrong and end up in a state worse than things were before regulations were enacted. A free market solution is always ideal, people should just vote with their money. However, I don’t think this is really possible in this case.
A new platform could always come up with some innovation and replace existing platforms. But platform economics are naturally monopolistic: The bigger a platform is, the more suppliers are attracted to it. The more suppliers there are, the more attractive the platform becomes to consumers. It is a self-reinforcing loop that usually converges into one or two big players competing in a given space.
Even if one platform replaces the other, we end up with another big platform with just as much leverage over their suppliers.
Defining what a platform is
For the sake of this post, I’ll define a platform in a rather reductive way, but one that is very easy to test for:
A platform is any online service where users can sell goods or services to other users directly or indirectly.
This definition is very broad, but it works well because the regulations I’m proposing are rather simple. It would cover a platform like Uber, where drivers would be suppliers, as well as Amazon and its 3rd party sellers or Facebook and its advertisers.
Regulations I would like to see
My proposals are few and simple1, which is good in itself. But I think they would provide tremendous benefit in proportion to the effort they would require to implement.
Platforms can’t deny access to access/features unless a rule in the supplier contract was broken.
What this means is it would be illegal, for example, for YouTube to de-monetize a channel because the owners are doing something shady, but not breaking any specific rules in their user agreement.
Contract clauses that give the platform freedom to cut features/access with no contractual clause being broken would also be illegal. Platforms would still get to write their own terms of service, but as long as a user didn’t break any rules in his user agreement, he can’t be denied service.
As a consequence, suppliers can naturally go to court and prove they didn’t break any platform rule and get their access restored, should that be the case.
Suppliers need some degree of legal safety. Letting platforms deny their service with no option for legal recourse as they do now is harmful for the economy and also for our freedom of speech.
Platform owners should be subject to the same terms of service when competing
Spotify has to pay 30% of its revenues to the App Store2 while Apple Music doesn’t. When Google shows ads for the Gmail app on the Play Store, it doesn’t have to pay anyone for the privilege.
This is bad. It allows platform owners to have artificially cheaper products or artificially higher margins just because they own the platform, not because of any characteristic of their product.
I reckon this one is quite tricky to implement. Who should get the 30% Apple Music fees? Apple can’t just pay itself. Should this money just get taxed? Donated to charity? I don’t really have a good answer.
Allowing platform owners to do as they please inside their realm is harmful for competition. But ensuring they are actually playing by the same rules as everyone else is really hard to enforce.
Conclusion
Platforms are relatively new as a business model, but it is already quite clear they will play an important role for the forseeable future. They are already important enough that their abuse is causing substantial harm. Because of this, I believe some regulation is needed.
I tried to err on the side of caution. I discarded more radical ideas such as simply prohibiting platform owners from competing inside their own platforms. It would be much easier to implement, but I think it would still be a net loss for society.
I’m not a lawyer, some things I’m proposing here might not even be legal or viable. My idea here is not to turn these specific proposals into law. I just want to spark a debate that I think we need to have as a society.
What are your thoughts? Are the existing laws adequate for platform businesses? Should the platform market just be left alone and competition will eventually control abuse? Am I just exaggerating? Perhaps what I refer to as abuse here is just standard business practice and nothing should be done about it?