A casual conversation with a very sharp, non-competition audience on competition and digital platforms (PART 2)
This is part 2 of a transcribed discussion with Percept Actuaries and Consultants
Helen: Okay so I’ll focus on digital markets now a little bit as I said earlier. I think you may not be aware of how aware you are of these things because we all use digital markets every day, particularly platforms, which as you probably know, are a connecting or meeting space, often like a network, where you have a supplier on one side, you have a consumer on the other side. If you shop online, chances are you’re using a platform if you use social media, Instagram, even Linkedin, you’re using a platform.
All of these things are a meeting place, it may be in the case of Instagram for advertisers and consumers, in the case of Takealot if you’re shopping online it may be in the case of suppliers and buyers, but we are all using these all the time and many argue that this is like the the factory, where the industrial revolution was built around the factory, today’s economy is built around platforms.
And this also makes me think, well why are they so different? Before you went to Shoprite, sure people were supplying to Shoprite, you went to Shoprite, you bought something, it was a platform right, it’s a physical platform, so what’s the fuss about an online platform, it’s the same thing?
But it is very different because the borders are so much more blurred. Whereas that Shoprite, maybe it serves the people in your town, maybe the region, those on holiday. Now you can launch an online platform instantly and depending on the service, if there’s logistics involved or not, you can reach the whole country, you may even reach the whole world very quickly, and so it really scales a lot more, it’s very different.
It also moves a lot faster and there are network effects, meaning that you want to be where everyone else is, you want to be where the suppliers are, you want to, in the case of social media, you want to be where your friends are, so these kinds of gains accumulate very fast and these markets move much faster than regulation, faster than competition authorities, so everyone is left thinking what should we do, and meanwhile business has sped ahead.
So obviously these things are exceptionally good and there are many more routes to market, if you want to start a business chances are you can do it very easily, you can start selling some stuff online through one of these platforms super easily, fairly cheaply, and you can get customers overnight, so it’s really providing a lot of opportunities, these things are really good.
But there is also the question of power concentration, and I’ve put an illustration here of the big platform companies, I’m sure you all know Facebook is now Meta, then Microsoft, Google, Apple and Amazon, these are the big five tech firms, and it shows that at present they have 25 percent of the total market cap of the S&P, these are the biggest five companies in the world. I think it’s quite phenomenal, and if you look at this picture ten years ago it’s totally different, the top ten are not online platforms. These companies are really shaping the economy that we are facing today and more topical questions globally.
So before I move on to what’s happening in South Africa, there have been market inquiries all around the world on digital markets, and on digital platforms in particular, and these markets are bringing slightly harder questions compared to what competition economists previously dealt with. I mean the questions we already dealt with, as with your questions, were fairly hard, and hard to bring really good defensible evidence, but now we’re faced with new sets of questions and have been for some years.
I’ve listed some of these questions and maybe after the next slide I’d love to also hear any other thoughts as well, I think you will have many. Some of the questions are, how do we define the markets and analyze behavior when you don’t have prices… so a decade ago the go-to metric for an economist would be to pull the price and see what the behavior of the firms are, now the prices are often free, you have to look at trade terms, you have to look at a whole host of other behavior, and also these platforms have multiple sites interacting as well, so the market is not so simply defined anymore, you may be operating many different services through both sides of the market, it’s a bit trickier.
Secondly what is a fair fee to charge to use the platform and what effect these fees have, so if a platform charges, for example higher prices to a smaller supplier compared to a large supplier what effect does this have in South Africa, what effect does this have on participation, how do you define those costs that you charge for accessing a platform.
Thirdly, how do ranking algorithms work, I think most are probably aware of the big Google Shopping case which is quite famous and especially where you have a marketplace which essentially means that the platform is both a connecting point and a competitor so maybe you go on to Amazon, Amazon maybe has its own products plus it sells competitors’ products, are they self-preferencing? I use this as an hypothetical illustration not a fact or view, but are they self preferencing their own products over others and how does one check this, can you get access to the algorithms to figure it out?
Fourthly, some data barriers are in terms of training AI and machine learning and this is really important, the more data you have often the better models you can train, the better connecting platform you can provide, if you don’t have a lot of data there’s a little bit of a cold start cost depending on the type of data, and how quickly you can get that data, whether new data is just as good as old data.
Fifth, often platforms are leveraging power from one market to another, so we’ve seen everything, Facebook wants to move into dating, WhatsApp wants to move into payments, and so you see platforms are in one market and overnight you see they’re in another market, and this is a wonderful position to be in for a business but what does that mean in terms of the power that they are holding.
And then barriers to entry, are big firms buying up small firms or doing acqui hires — acqui hires are essentially buying up talent, especially in the tech space you might not buy a company, you buy the people, and it’s essentially the same thing — and this is a big question especially in the US, it has been for a long time, basically before firms are even big enough to have the merger notifiable, are big firms already buying the rest whilst they’re under the radar, essentially buying up what will be competition if left as is. This may be an interesting point because many of these firms, especially in Silicon Valley, they start up in order to be bought out, it’s the whole point of the process.
And then the final point I have is network effects, leading to tipping, winner takes all, an unassailable position. So simply the question of are these firms, the big five I’ve mentioned just now, is anyone ever going to catch up to them, or is this is the market sort of set, they are so far ahead, basically the question of what parts of this landscape are due to natural network effects, benign behavior, and what is due to any potential anti-competitive behavior.
Particularly in the tech space, there are new competition cases globally almost every day, and well the so-called free market as we, well some of us were taught, we want to know, will it work to ensure competitive offerings, or do you need to regulate? Crucially you don’t necessarily need a lot of firms in the market to make it competitive, you can actually have a few, but as I say, is the landscape could be so sticky that you know not much is going to change over time, or is there going to be dynamic competition when new firms come in as well and of course are more platforms really useful?
I think always good to ask the simple questions, I mean in South Africa, maybe people think about Takealot, which is a great platform, I mean do we want another Takealot, is it even practical to have this, should we just leave it as is, should we worry about in-country competition with all the imminent entry of internationals?
So on the market inquiry which I’ll mention, should we be stressing about in-country competition between different platforms given that very likely Amazon is going to move in, further all the internationals are going to move in, so that competition will be there anyway?
And I’m sure everyone is aware the Cambridge Analytica case happening some years ago, should we be worried about other things that don’t fall into the traditional competition space like political and social power, and is this also in the domain of competition policy, or does it touch on it at all and from a value creation perspective?
Then this is a side thought, not competition policy related per se, but why South Africa not a bigger leader in these markets, there are huge and exceptional pockets of competition, and bigger is not always better, we however have exceptional pockets of innovative companies in South Africa, but there’s no strong reason why we should not be a global leader in many of these markets, it does not require or rely on headcount or natural resources or something like that, and so I often think about this too, why we are not in that top ten list.
Let me pause for a moment…
Rose: I think we’ve seen, especially in digital markets that the regulatory lag is always a problem when it comes to technology not just with competition, with everything else like regulators, which are not able to keep up with all of the developments there are, whether it’s crypto, whether it’s telemedicine… Are there any examples of countries or geographies, that do this really well in being able to keep up with technology and regulate accordingly, or create space for it in that way?
My other question is, I suppose the network effect of a lot of these players, the way that they compete, the way that they’re regulated often has like a global impact in certain places, so if I think of for instance, your European equivalence of of POPI or private protection of information, because of the way the internet is, any sort of internet service provider, has to also take that regulation on and is that something that I suppose regulators take into consideration, that because these are global players it’s very hard to, to sometimes be compliant in just one geography, so is there ever a regulatory gridlock that these companies come across where you have to be compliant in so many different places, at what point does does it actually become a barrier to entry in the market?
Helen: As always exceptional questions Rose, you should be a competition economist. So yes the regulatory lag, I think this is a global problem, that regulation doesn’t keep up with the speed of innovation of businesses and competition. So market inquiries I think are quite useful, debatable though, I still wonder what are the outcomes of the HMI were, and we’ll see about some of the other inquiries but it’s a good process.
One country that I quite admire, I think other people will disagree with me, is Germany, they’re really ahead of things and I suppose one operating in a company in Germany is also maybe more used to a clear vision of what’s happening by the authorities, and sticking with it, so they’ve introduced a lot of policy that is an overlap between privacy law and competition law, things like if a site uses your data, they need to get your consent, so it’s not to say that they cannot use it for other purposes beyond the service that you’re using, but they need to get your explicit consent. Other parts of the world are a little bit more behind on this and also around the self preferencing, I heard recently that they also I think prohibited this by the platforms, an explicit prohibition, and these are actually quite big, I’d say bold moves, and that make quite a big difference but they definitely don’t take too long to to make these moves, I quite admire that. The rest of the world, there are ongoing debates but probably not fast enough moves, obviously also for the good reason that you don’t want to scare investors.
And then on the global compliance and barriers to entry, I think probably a privacy lawyer will have a good view of this, but yes GDPR I think in Europe mainly and POPI here in South Africa, which I still wonder if many are compliant with, but there’s no international competition authority so each jurisdiction is to its own as to whether you are compliant, and yes absolutely it could be a barrier to entry — often you don’t see it though, you won’t see who was going to enter because they didn’t.
Shivani: If you are located in South Africa and you’re buying a service from a service provider that’s located elsewhere in the world right, like we play Slack a fee but that goes to America and our Microsoft, our Google subscriptions go to America, the South African competition authority doesn’t have any jurisdiction over that right?
Helen: So as I understand you would need to have business in the country where the competition concern is raised and I think a lawyer would probably be a better place to you assess whether you need to be like fully registered or the extent of your business in that in that country, but like I’ll mention now, the WhatsApp case was launched, essentially the South African Competition Commission launching a case against Meta, due to the WhatsApp business, so it does happen where a big international is brought to question in another country.
Shivani: Yeah just I was thinking about two examples that we know of, I won’t mention who and the details of it but the one is where it’s a big corporate listed listed South African company that has bought into a software provider ecosystem, and they were considering building a bespoke system, and then in discussions with the software provider they (the provider) indicated that they’d do the dev for free, but it’s clearly a strategy to keep you in the ecosystem.
And then there’s another example which I’m only now thinking about from a competition perspective where also an international kind of platform player, has invested into a firm, they’re building a platform and some of the investment money into that platform is coming from one of these these global players, also interesting because it’s not an investment that doesn’t come with strings attached right and I’m sure it’s linked to you must use our platform for this, this new ecosystem, but yeah it’s a very big ambitious play by a local player which then is hooked into a global system, so it’s really interesting because it feels very pervasive, and I’ve been thinking about it I guess from a social and political perspective, but I think the competition lens is really interesting to see the ways economic mechanisms are used actually to exchange positions, that have political and social, very big political and social consequences.
Helen: Absolutely, those are brilliant examples, I would love to learn more about it from the perspective of someone who actually raises a complaint because that’s not a side that I’ve personally experienced but essentially if you if you launch a complaint you know, you send an email and you know are you going to be dealt with, what are you walking into, is this going to be a long drawn out process, it’s possibly an expensive exercise, do you even have incentive to do so, I just don’t have that user perspective so I’d love to learn more about that.
Rose: Right, I just want to squeeze in one more question and it’s about the network effect and how like a lot of like the tech players that you mentioned they became big because eventually the network effect is there, now that we’ve seen this happen a few times, is there any way to anticipate it, so that you can almost decide when when a player gets sort of this size, this sort of regulation kicks in to prevent this the influence of the network effect, or would that be just hindering their business altogether because players like that want to have as much of a network effect as possible?
Helen: Yeah if you’re a business owner, and working in innovation I suppose this is how you think, like the Peter Thiel's of the world, this is how they think, so it’s good to wear both hats and understand them and as you say, you don’t want to disincentivise exceptional business, so in Europe and the US its still being concreted but essentially there is a special responsibility for the firms of a certain size so it’s not per se saying you cannot have further network effects, that it wouldn’t be possible, but basically a firm of a certain size has a special responsibility to act in a certain way, so not contesting how big they are just making sure that they understand that position thereafter.
So what’s happening locally? I think I’ve already mentioned there’s a market inquiry, into digital platforms in South Africa, it will apparently be completed soon and you can find everything online if you want to watch the public hearings.
Who’s participating? A lot of the firms that we all interact with, if you sell your property with the classifieds, you sell your car, you buy products online, you book accommodation online, these are all the platforms that are participating. None should be particularly surprising to us, I’ve also put a list there.
And the focus of the inquiry is really around online intermediation platforms, fintech is not part of the deal for now, also social media is not part of it for now. In my view these would be great topics for further inquiries, if this is an efficient and useful process.
And the point is to really understand how is competition is functioning between platforms and then also how firm behavior within a platform is, so how’s that platform treating its suppliers and buyers and then particularly focus on SMEs and HDP firms.
With regard to lines of inquiry the first point is very general, all the stuff that economists usually do, looking at trends and adoption, basically market shares, entry, all the general stuff, and this has been quite contested because in those November hearings for example Naspers was quite heavily questioned about who are you investing in, why are you not investing earlier, in earlier seed rounds, why are you not investing in more transformed companies, and I think they were a little bit surprised you know, is this part of the competition scope, that was a bit of a surprise, and so also thinking about what are the barriers to entry in this respect from an investor perspective, and in my view a lot of competition policy in the next decade is going to be focused on private equity firms, I think a very topical space.
And then the second big point I’ve listed, lots of the detail as to what will be looked at, I already mentioned many of these things so I won’t mention them in further detail now, you’re welcome to ask.
And I wanted to speak about Govchat, this was launched separately to the inquiry — sorry I should mention also this gentleman is James Hodge, he is heading up the inquiry, very smart man, and he’s running a very tight ship — and then separately to the inquiry the other big matter that’s happening in South Africa is this Govchat case against Meta, it’s been in the works for a little while, it’s a prima facie case, meaning the commission just has to bring I’d say fairly light evidence and then the onus is on Meta to prove that there was not a problem here, and given that it’s this kind of prima facie case, there is very little I can say without strongly speculating but having thought about it a little bit the way I understand it, Govchat and Hashtag Let’s Talk both, they were using WhatsApp services, Whatsapp Business services over a long period of time to communicate about social grants, you can report potholes, all these social services, and essentially they were quite reliant on WhatsApp, and at some point Meta then said, I think due to data privacy issues we need to off-board you from the system, I think as far as I read from the statement, Govchat and Hashtag Let’s Talk wanted to access certain data in order to, exactly like Shivani was saying maybe produce their own competitor, but they needed to access the data that they were seeing and getting through Whatsapp, they needed to access that data in order to build that separate system and it seems from what the brief media statement reads, it seems that given privacy concerns Meta indicated that they could not have that data and essentially they were then off boarded or threatened to be off boarded.
No one has specified what is the data in question, if it is personal details then I’m sure privacy lawyers would say we need to think about POPIA, so there’s a lot that we don’t know for the moment but this is likely to be a long case, I think you should all keep track of it in the media and read any brief articles that you see.
I’ll stop here, any other thoughts, I do have minutes.
Shivani: So thought-provoking thank you so much, I would love to have a further conversation about the investor behavior stuff you sort of alluded to it but like particularly in the US where the investors invest with the explicit intention of being acquired, what does that actually mean for for the kind of shape and size of an economy and it’s one of the one of the issues here, in that there’s been sort of a decline in investment because there’s a feeling that the regulatory environment is such that your exits as an investor are limited and increasingly being closed off so if you invest in something you can’t actually get out because the regulations against foreign investors and competition law and all of that sort of thing, so it’s really interesting in terms of what sort of investment do you want to encourage and how do you allow that without creating this kind of acquiring bigger bigger bigger interface.
Helen: Strong words and yeah very interesting, how do you create an attractive investment environment for buyers and also for sellers, as you said as you also want to be able to sell when you want to sell, like we saw debated in the recent Burger King case, yeah you know it.
Okay time is up so thank you very much all for engaging and all your questions in particular, really such a lively sharp audience and I really appreciate it a lot.
All views are my own and do not represent any other firm or person.
