Google, Apple, Facebook and Amazon are monopolies. Not the same kind of monopolies like Standard Oil or Ma Bell that rely on heavy infrastructure to lock-in a consumer. Instead, they are a new kind of monopoly. An asset-light monopoly that achieves lock-in not through infrastructure, but through network effects and critical mass.

These monopolies are arguably more powerful than the old, linear monopolies. They have a winner-take-all dynamic which means one or two companies will control almost the entire industry. Look at online search with Google at 70% and then Bing with a small runner up. Or, Instagram vs. Snapchat. Facebook vs. no one? YouTube vs. Vimeo or Twitch (kind of?).

While these platforms are all private companies, the importance of these companies makes them in many ways quasi-public goods. Given their dominance, their actions and policies create externalities for the rest of society.

The big problem lies in the massive information asymmetry between a platform and its users. Because of this asymmetry, the inner workings of a platform are often a black box to users and you have little recourse if a decision doesn't go your way. This asymmetry is easy to abuse. For example, Facebook got into ethical hot water for testing how negative news impacted newsfeed engagement and user sentiment - all without any of the users knowing they were part of this sinister-sounding experiment. In a more straightforward example, Uber has taken to hiding how it arrives at its pricing. This has enabled it to hide when its charging you more than the cost of the ride. For Uber this is pure surplus profit that's its able to extract simply because it has more data than its users and doesn't need to be transparent around how it uses that data.

When your company is a monopoly, that also means you are a public utility. And, when you are a public utility, you lose certain controls over your business: like being able to decide if you want to allow someone on your platform or not. A company traditionally can choose to do business with certain customers, that's their right. But not a public utility. As a utility, it's your duty to serve the broader public, and you lose certain rights to limit user behavior on the platform.

For example, In the case Marsh v. Alabama, a private company town could not prevent the distribution of religious materials on the town's sidewalks because of infringing upon the peoples' first amendment rights. Even though the town was considered to be owned by a private company, it was treated as a monopoly and public utility. This is one approach that could be taken to regulating platform monopolies. 

Modern Monopolies are Platforms

I co-authored the book, Modern Monopolies, which explains the new business model behind the four horsemen phenomenon: the platform business model. And, we're still in the early innings. The platform business model is having a similar effect that the industrial revolution had a couple hundred years ago. Entire industries are being completely redefined in years, not generations or even decades.

There are two key dynamics in understanding the platform model and how regulation could take effect: access vs. usage and the core transaction.

Access vs. Usage

Platforms typically charge for usage and not access. They monetize off of the exchange of value that is being created by third party producers. Uber makes money when you take a ride from one of its independent contractor drivers. The App Store takes a 30% fee on all digital purchases from its third party app developers. Regulating platforms for access is pretty straightforward because it's binary whether or not a user is allowed to sign-up and use the platform, or not. Regulating for usage is much harder.

Core Transaction

The core transaction is how every platform creates value through facilitating the exchange of value. There are four key steps in every core transaction: create, connect, consume and compensate.

One example of where the four horsemen have gotten into trouble is not just for cutting off access to certain users, but for throttling matchmaking in the connect stage. You've probably heard of Twitter's "shadowban" which would fall into this category.

Similarly, Google will shadowban web pages that it believes have manipulated their search rankings, often taking these sites off of the first page of key search results and burying them far back in the results. This kind of curation is much harder to detect and regulate effectively, again because the mechanism and how the decision was arrived at is not transparent to the user. Matchmaking tactics and algorithms are constantly being modified by a platform's product engineering teams to better facilitate more core transactions. If regulated too heavily, it could dramatically hinder a platform's ability to improve and stay competitive.

But there's a middle ground that brings greater transparency around how and why platforms make decisions, while giving users greater recourse if they believe they've been wrongly affected. A neutral third party, for example, could audit the protocols and algorithms that these platforms implement to curate usage and sometimes access.

In Mark Zuckerberg's testimony to Congress, even he invited the prospect of being regulated. His answer when asked if Facebook was a monopoly? "It certainly doesn't feel like it to me." He could've had a much better response, but deep down I believe he knows that he is a monopoly and regulation is inevitable. The question is will the four horsemen fight it or work in a collaborative manner to get it right?

Published on: Sep 4, 2018