Each week David Souter comments on an important issue for APC members and others concerned about the Information Society. This week’s blog post reflects on the platform economy.
Last week I asked if we should fear online monopolies. This week, I’ll ask the same of online platforms, and the new economy they’re bringing into being.
What is the platform economy?
Let’s start with definitions.
The “platform economy” describes the trend in business away from traditional firms – which deliver goods and services to customers using their own staff, premises and resources – towards online firms that connect independent buyers and sellers of goods and services online.
In one sense, the Internet (or the Web) itself’s their platform. But the term is used more often for the platforms running over it, like Google (a platform for accessing information), Facebook and Instagram (for interpersonal communications and for publishing), Twitter (likewise), Amazon and eBay (retail goods), Spotify (music), Uber or Airbnb (providing specific types of service), or crowdfunding (KickStarter).
There are different business models here – from publishing to online retail to new ways of providing services like taxis and hotels. There are platforms for platforms, too, such as cloud provider Amazon Web Services. What’s common to them all is their reliance on the Internet, on algorithms, on the cloud, and so on ICTs. Together with the new relationship they’re forging between producers, intermediaries and consumers.
So what’s new?
Nothing and everything.
In some ways, online platforms are quite like traditional marketplaces – the market squares that people in many places still use to buy food and clothes; the bazaars and shopping malls in which a wide variety of retail outlets share infrastructure and compete with one another.
Two differences, though. Those malls and market squares are local. Google, Facebook, Amazon, Uber and the like are global platforms. They benefit from the economies of scale, network effects and massive data volumes that I wrote about last week. These factors foster market dominance at global levels.
Second, online platforms interconnect anyone with anyone, rather than providing access to a restricted range of businesses. Anyone can publish content on Facebook or Twitter, provided they’re connected. Anyone can offer accommodation on Airbnb, provided that they’ve got a home to offer. Anyone can sell goods and services to anyone in any country, no matter how small their business (as they do, for example, on eBay or as Amazon third party vendors).
What impact do they have?
Platform businesses are disruptive business models. They use technology to challenge the way things have been done within traditional markets, in ways that force existing firms to change as well or drive them out of business.
We’ve seen this happen in repeated waves online. Music platforms such as the iStore and Spotify have displaced physical CDs with downloads, forcing traditional music retailers online or off the high street. Online travel agencies like Expedia have done the same with their traditional counterparts.
A majority of people in some countries say they now get their news from Facebook rather than TV, radio or newspapers. Amazon delivers a greater variety of goods, more cheaply, than high street retailers while also offering a platform for third party vendors. Uber’s algorithms connect customers with drivers more efficiently than hailing taxis on the street or telephoning local cabs for hire.
Platform businesses leverage the Internet to gain market share through increased efficiency, greater convenience and lower prices. They’ll become more pervasive and more powerful, at the expense of more traditional business models, as long as they can do this. They’re going to grow their share of the economy, so our economic systems must adapt to meet them.
Reasons to be cheerful/fearful
Will the change be positive or negative? There’s no agreement. As one recent academic paper puts it, cyber-optimists suggest that platform businesses will bring about ‘a utopia of abundance’; cyber-pessimists ‘a dystopia of limited employment and stunning inequality.’
In practice, the impact’s likely to be different for different platforms and in different places. Take Uber, for example.
Some countries have highly regulated taxi markets, with qualifications and license fees for taxi drivers and standards for vehicle maintenance and safety. Drivers are required to provide services to those with disabilities, not to discriminate against minorities, to have unblemished criminal records. Other countries have unregulated markets, without any of these standards or requirements; in some, indeed, organized crime controls much of the taxi market.
Uber’s entry may reduce standards of customer welfare in the former, but raise them in the latter. In both, it’s likely to improve the efficiency with which supply matches demand. But its ability to do this will interact with other factors in society, including the wider labour market. And sometime, eventually, Uber will need to start making a profit if it’s going to survive.
Much, in other words, is going to depend on context. I’ll suggest three general challenges we should think about, to be going on with.
The risk of more monopoly
Interactive networks tend towards monopoly (see last week’s blog). The more users platforms have, the more data they acquire, the more efficient they become, the more attractive they become to more users again.
Global networks also require massive capital investment. So most areas of the platform economy are likely to be dominated by few global businesses which have great economic power, with economies of scale that give them competitive advantage over local players – not to mention greater ability to bypass national regulation and taxation.
There’s a geopolitical aspect to this, too. Almost all today’s global platforms are based in the United States. Few other countries have the necessary market size to build such global players. Governments may become uneasy about foreign domination of important economic sectors, especially if profits are repatriated overseas.
What about the workers?
There’s been a lot of argument about the impact of the platform economy – the ‘gig economy’ as it’s called in this context – on the quality of jobs and earnings.
Platform businesses rely on casual workers. Instead of directly employing people, they claim to act as intermediaries between people who are self-employed and those who want to be their customers. Uber, for example, says that suits drivers as it enables them to work more flexibly. Its critics say that it cuts earnings and denies drivers employment rights and benefits (holiday pay, sick leave, etc.) while leaving them dependent on the platform for their livelihoods. Some courts are saying that they are really employees, not self-employed.
The issue here is partly economic: who gains monetary value from this new business model – the platform itself, consumers and/or workers? But it’s also about the survival or the loss of social protections which have been won by past generations of employees – protections which are set out in national legislation (and, indeed, the International Covenant on Economic, Social and Cultural Rights).
Regulating our societies
Similar challenges arise with other aspects of societies. Many of the norms and rules which govern these were developed for the old economy: for businesses with premises and employees, that could be regulated easily by national and local governments. It’s much more difficult to enforce social and economic regulations on global platforms (which are outside national jurisdiction) or on large numbers of individual buyers and sellers.
Airbnb provides a clear example. Hotel businesses in most countries are highly regulated, to make sure that they comply with fire safety standards and land use regulations; that they don’t discriminate on grounds of race or sexuality; that they are insured and pay their taxes. Airbnb’s business model offers customers more choice and lower prices, but at the risk of non-compliance with these norms and regulations.
As to the future?
The platform economy offers more efficient business models with significant benefits for customers. It is pretty certain, therefore, to become increasingly pervasive. But its business models don’t just disrupt traditional businesses; they also disrupt some of the social and economic values – employment rights, planning controls, anti-discrimination legislation – that societies have chosen in the past and, where they have done, still think to be important. If we don’t want to lose those values, we need to find ways of incorporating them in the ways that platforms work.
Next week, a look at the World Bank’s proposals for managing identity in the digital age.
Image by Greyweed used under Creative Commons license.
More about David Souter here.