Year after year, the economic and financial power of the GAFA quartet of Internet platforms continues to increase. Which brings two questions back to the fore, again and again: what trends might emerge to counter this seemingly inexorable rise? And do we need regulations that apply specifically to platforms?
A quick reminder of what economists mean by platform economics (digital or not): multi-sided markets (i.e. involving interactions between two or more parties) with reciprocal “network effects”. So the more iPhones that Apple sells, for instance, the more attractive its app store becomes to developers (and so to users), and vice-versa. In digital sectors, this characteristic is typically combined with a reduction in fixed costs (software), generating increasing returns as the platform becomes more successful.
Network effects usually go hand in hand with another property: asymmetrical prices. If Apple is starting to earn substantial income from the App Store, its business model and profits are rooted chiefly in the high price of its iPhones. With ad-funded models, one side of the market operates as a free service. As we have seen with Apple, digital platforms are a very efficient means of fostering open innovation, and capitalising on innovations from third parties. All of these aspects, which go some way to explaining why “winner takes all” when it comes to platforms, naturally need to rely on the ability to maintain the role of intermediary, and continue to become more proficient at it. Otherwise, the platform’s customers and suppliers will begin to adopt multiple homes, before eventually moving on to another, better platform. The efficiency of the leading platforms is the very reason for the current ambivalence over how much they are serving the greater good. On the one hand are concerns that a dominant OS will abuse its position while, on the other, this popularity can also mean an opportunity for developers, and can have positive repercussions for consumers.
The dichotomy needs to be resolved by taking account of the Internet’s dynamics as a whole. Windows has been through a number of anti-trust investigations but, today, this is the mobile Internet which has moved down the priority.
Worth reading on this topic is the recent IDATE report on "The future of the Internet: 2025". It takes a detailed look at the key technologies for the coming years, and especially at how development scenarios will be shaped by key variables, such as the openness of the Internet ecosystems, or the impact of restrictive privacy or security-related public policies. Here, we will add two other events that take us beyond a GAFA-centric environment. First, 2014 saw a number of Internet powerhouses emerge from the shadows of the GAFA quartet: in China (Alibaba, Weibo…) and in Asia’s leading markets in general (Rakuten, Line…).
We cannot entirely discount the possibility of these players gradually coming to compete head on with their Western peers. Second, we need to consider the position held by new players moving into vertical markets, many of which have carved out a place of sector-specific intermediary – Uber and Airbnb being two prime examples – and which have no intention of being taken over by Google or Apple or the like.
Nevertheless, faced with the realisation that GAFA continue to become increasingly powerful, the inefficiency of antitrust laws and the regulatory asymmetries compared to those imposed on other players along the chain, the idea of regulation that applies specifically to platforms is gradually coming to the fore. It may not be a good idea. Competition law, even ex post, is not necessarily ineffectual.
Plus it will be no simple matter to define the contours of the platform sector. And extending existing sector-specific laws, such as those that apply to electronic communications, to make OTT companies and telcos subject to the same principles, would take us down a path where, as businesses become more and more digitised, every economic sector would be more or less governed by electronic communications laws. Keeping in mind that the upcoming review of the EU regulatory framework for electronic communications is expected to focus on network access conditions and interconnection – and probably put more emphasis on symmetrical regulation. Should voice and SMS products not be removed from the scope of the telecom sector’s ex ante regulation, rather than adding in competing OTT products such as Skype, Viber, WhatsApp, etc.?
It nonetheless remains that in sensitive areas for digital industry players, such as those governing contract law, taxation, public safety and privacy, we can very easily identify laws that should apply across the board, such as what we find in consumer products and the retail industry. Without having to produce laws that are specific to platforms, the current juncture could provide an opportunity to merge national legal provisions with regional (EU) and global ones, and to ensure that they apply equally to all players along the value chain
For the publication of the last study about "the future Internet in 2025" and the 15th edition of the DigiWorld Yearbook, IDATE is organizing a conference on the perspectives and key trends that will structure the digital economy for the next decade, DigiWorld Future
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Senior Consultant - DigiWorld Institute by IDATE
The turnover of e-commerce: 1.34 trillion EUR in 2016
IDATE has just published its new edition of “World Internet Usages & Markets” report. This report provides data and forecasts on Internet services markets – usage and revenue, by country and region. It covers Europe, North America and Asia, and analyses both the major trends in each segment and the market’s key players.
“The revenues of key services (online search, video-sharing, social networking and e-commerce) will experience double-digit growth, reaching more than EUR 108 billion for online advertising in 2016.” comments Soichi Nakajima, Project Leader and senior consultant at IDATE. “This solid growth will nevertheless be limited in 2012 by fears of a recession. E-commerce is another industry heavyweight, with smaller margins but with an estimated turnover of over EUR 1,300 billion by 2016”
The Internet economy
The revenues from the Internet economy considered in IDATE’s recent study are of three types:
- Revenues related to advertising, which in 2011 accounted for almost EUR 53 billion worldwide;
- E-commerce, with a global turnover of EUR 717 billion in 2011, and operating margins obviously much lower than advertising;
- Revenues from fee-based services and content. This study focuses exclusively on feebased video services, which generated a turnover of EUR 3.7 billion in 2011.
- The Online advertising market
The online advertising market is highly concentrated around a few support websites. Google accounted for nearly 50% of global income from online advertising in 2011 (almost EUR 27 billion). Facebook is still not terribly strong in this market, earning just over 3 billion EUR in 2001, only slightly less than Yahoo! whose income is tumbling. In order to better compete with Google, Microsoft and Yahoo! but also Facebook and Microsoft have in fact joined forces, strengthening the oligopolistic effect. Google, Facebook, Microsoft and Yahoo! are also major players in most national markets, with the exception of China – where Baidu and QQTencent reign supreme – and South Korea (NHN/Naver,Daum…).
The online advertising market is more fragmented upstream of the value chain: the advertising segment is rather dispersed, and the search marketing solutions, made affordable through high automation, make this advertising medium accessible to a large number of advertisers, even modest ones (SMEs). All major support websites (portals such as AuFeminin, news portals, ISPs, etc.) seek to develop their own advertising activity on the fixed Internet.
- The E-commerce market
The turnover of e-commerce will continue to grow steadily, with double-digit growth rates, reaching more than EUR 1,340 billion in 2016. E-commerce still represents only 1% to 8% of retail sales and its growth will be fuelled by several factors:
- An increasing number of Internet users (particularly in China)
- An increasing number of Internet users shopping and paying online, particularly in countries where e-commerce is still relatively incipient, such as Italy and Spain
- An increase in the average annual purchase volume per buyer
- On the other hand, new sales strategies, including the integration with social networks or localised bundled offers (such as the successful Groupon website, which offers attractive local discount coupons whose validity is subject to a sufficient number of buyers).
- Lastly, unlike advertising, e-commerce seems more immune to the financial crisis as consumers turn to the Web to find the best prices.
Revenues of e-commerce by region, in 2011 and 2016 (million EUR)
Source: IDATE, in "World Internet Services Market", December 2011
- Revenues from fee-based services
Although the Internet economy is dominated by advertising revenues associated with free services, some players are able to charge consumers for value added services or digital content (as streaming or download).
Online video in particular is a major segment of online content, with a strong monetization potential through fee-based services, particularly with fixed access, and will continue to grow to represent a market of over EUR 12 billion in 2016 in OTT distribution (especially in relation to connected TVs).
The Emerging M-Commerce
Mobile commerce has emerged with the purchase of media content (ringtones, music, etc.). It will develop with other types of digital assets, such as travel and event ticketing. Physical assets are following, already representing more than 40% of m-commerce activities in Japan. M-commerce is particularly well represented in Japan, where it reached over EUR 10 billion in 2011. The other markets, still far behind Japan, should experience growth rates above 50% per year.
Market growth will be driven by different factors:
- Deployment of broadband mobile networks (3G and LTE)
- The spread of smartphones with easy browsing capabilities on mobile websites, and payment solutions adapted to the device
- Commercial strategies of online merchants, promoting the use of mobile services as an extension of their standard (i.e., fixed) website. EBay reports EUR 2 billion in revenues from mobile consumers in 2010, or 1.5% of its total turnover
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