The gatekeepers of the tech economy - some observations on competition and innovation

In line with the East Asian trend, SuperApps, or an umbrella platform/App that consolidates and allows access to several kinds of individual service Apps (including that of others), are becoming the flavour in India. Reliance, Tata, and PayTm are all pursuing their respective superApps. 

While the SuperApps of Reliance and Tatas are aimed at consolidating their portfolio of Apps, PayTm is consolidating third party Apps to leverage its payments service. As the article writes, there are both pros and cons with superApps and it remains to be seen which prevails in the months and years ahead, and whether India too will have its WeChat or Grab equivalents. 

In the context of the rise of SuperApps, a few observations:

1. The digital marketplace is rife with risks of emergent gatekeepers. 

Consider three potential gatekeepers. One could control access for the software. SuperApps belong to this category. A second could limit access by controlling payment mechanisms. They include Appstore and GooglePay. The third could restrict access by owning the hardware. Apple's iPhone is an example.   

We are already seeing the problems on anti-competitive practices with the second and third. In fact, Apple is perhaps a case of market abuse on two dimensions. It restricts all iPhone users to Appstore, and then all App users on iPhone to use only Appstore. 

Similarly, while a SuperApp which would bundle all Apps under one giant App would undoubtedly help the individual Apps piggyback to access the marketplace created by the SuperApp, it also confers a disproportionate power on the SuperApp owner, a power which, if precedent tells anything, is most likely to be  abused in future.

2. Why should the digital market place be substantively different from the physical marketplace? 

As a parallel with other general purpose technologies, consider the following. Assume if the founder of electricity was given gatekeeping powers which would allow them to charge royalties on all equipment which used electricity.  Or for vehicle or railway carriage manufacturers to share their profits with road and railway line owners. Or if a newspaper says it has not gatekeeping responsibility for its published content.

In these cases where such risks emerged, they have been mitigated by active regulation. The distinction between common carrier and content is maintained in all physical markets - roads and vehicles, railway carriage and rolling stock, pipeline and oil/gas/electricity supply and so on - and regulatory architecture built accordingly. Digital markets are no less immune from the problems that necessitated this regulation and should therefore be subject to the same regulatory design principles. 

A hardware, payment mechanism, or operating system/platform is, most often, as much a common carrier as roads or pipelines. If this insight is not evident due the emerging nature of these innovations, it's only a matter of time before they become egregiously so. But a lot of avoidable damage in terms of limiting innovation, reducing output and consumer surplus, and rent-seeking would have happened by then. 

There is no compelling argument to suggest that digital marketplaces should be allowed any preferential treatment vis-a-vis the physical marketplaces. While it may have been true that digital marketplaces required some preferential treatment in the early stages of their evolution, as indicated by the now infamous Section 230 of the US Communications Decency Act, there is no reason to continue providing the same preferential treatment. This only creates an unfair regulatory arbitrage advantage for the digital marketplaces, which as we have seen leads to socialisation of costs and privatisation of gains. 

3. Gatekeepers are pervasive across digital marketplaces and market abuse becomes inevitable.  

Consider the case of video streaming services. The emergence of Netflix as a dominant player is already creating tensions between it and various content makers. The plight of Uber drivers and Airbnb hosts in several cities across the world have been well-documented. Much the same is happening across several other digital markets. 

But this can be mitigated with the presence of multiple digital marketplaces. Consider the example of ride-hailing in London. Currently there are several Apps competing for dominance - Uber, Ola, and Bolt are just three examples - which gives drivers the genuine choice of shifting across platforms with little or exit/entry barriers. 

4. Once a gatekeeper, there exists the tendency to tighten the grip by moving into associated markets in the larger marketplace. 

Take the example of Apple. It has been and still remains a hardware company. But now, realising the plateauing of its hardware market, it is moving into the software market. The Appstore is its leverage in this second phase journey. Or take the example of Netflix, which started out as a streaming service, but is now getting into content production. In both cases, the downstream gatekeeping allows the companies to target capturing the upstream market too. 

All such transitions only tighten the grip of the provider over the entire market. In fact, as with the case of Apple (hardware and payment gateway), often such movements ends up adding another layer of gatekeeping power over the market. 

5. The possibility of SuperApps also underlines the importance of open access in promoting innovation. 

In the context of East Asia or India, a digital marketplace without any hardware or payment gateway gatekeepers meant that any prospective SuperApp provider did not face any entry barrier. It is also an important reason why SuperApps have not come to the scene in developed markets. How are we to say that a US digital marketplace with a prominent role for Apple and its AppStore is more efficient than a counterfactual of one with a couple of SuperApps? 

Or how do we refute the argument that Google's purchase of YouTube and Facebook's purchase of Instagram have constrained innovation in the videos and images marketplaces? How do we refute the argument that left to their own, these two dominant platforms on the video and image sides would not have spawned innovative and distinct consumer-surplus enhancing platforms on either sides? In fact, there is a strong case that these purchases have not only constrained innovation in these two specific markets but have also significantly enhanced the market power of Google and Facebook over their existing primary markets. 

6. The emerging structure of the digital marketplace in many segments is still uncertain and is likely to vary across countries. 

It is impossible to today predict the trajectory of evolution of the Indian digital marketplace in retail e-commerce. There are several uncertain elements. Whether the market will look like US or China will depend on a lot of factors. A few winners would have emerged in each major market. That emergence would depend on the initial conditions, emergent dynamics of the marketplace itself, and the nature of the prevailing regulatory systems. 

7. As a consequence of the above, lady luck has an out-sized role in the emergence of winners in digital marketplaces, more so than in the conventional physical markets. 

A typical product or service company responding to a felt-need only faces commercial risks. The marketplace structure remains largely invariant. In contrast, a digital company also faces completely unpredictable market evolution, which is beyond its control. Besides, even with the most enterprising spirit, the dynamics of the market evolution largely means that who emerges winner is a matter of luck.