Rise of platforms

There must be a way to reverse the default position of giving personal information for services provided by both govts and companies

With the digital revolution, based on the computer and the internet, affecting the economy, politics, and society, I have been trying to understand it through the outpourings of books — both hyping and critical of this digital future. One of the best, and also economically literate, is Machine, Platform, Crowd: Harnessing Our Digital Futureby the MIT Sloan School of Management professors Andrew McAfee and Erik Brynjolfsson. Their tripartite division of the title is a useful one. The first “machine” refers to the growing power of machines incorporating artificial intelligence as represented by the victory of machines over humans in playing games such as chess and go. The second are platforms such as Facebook and Google, and other social media outlets as well as those of the “sharing economy” such as Uber and Airbnb. The third are crowds like the sites for crowd-funding and crowd-lending, as well as blockchain-based cryptocurrencies such as bitcoin.

In this column I will discuss platforms, leaving others for the future. Platforms have crucial economic features. They are characterised by a nearzero marginal cost of access, reproduction, and distribution, making digital information goods free, perfect and instant. Moreover, they have network effects becoming more valuable the more people use them, leading to demand-side economies of scale, favouring the larger networks. This in turn leads to “winner-takeall” markets for digital services and goods. Finally, for platforms which allow outside apps, which are complements to their services, shifts the demand curve for the platform outwards, increasing their potential revenues. It makes economic sense to offer many of these apps for smartphones free. For, besides making them attractive to users because they maximise consumers surplus, being complements they also shift the iPhone’s demand curve outwards. Many of the free apps make money for their creators by showing ads to users. Thus, “Facebook’s app on the iPhone is free to consumers, but mobile advertising represented 84 per cent of total revenue for Facebook in the third quarter of 2016”. (p 162)

Companies owning platforms have prospered. In CNBC’s ranking of the top US companies by market capitalisation in March 2017, five of the first six were tech companies. This was not only due to the pure economics of their business. They were also able to use the political and legal system to their advantage. Though somewhat polemical, Jonathan Taplin in Move Fast and Break Thingsoutlines them. Thus, Jeff Bezos founded Amazon in Seattle using a 1992 Supreme Court ruling that “the lack of a physical presence in a state is sufficient grounds to exempt a corporation from having to pay sales and use taxes to a state”. As most of Amazon’s customers came from outside the sparsely populated Washington state they paid no sales tax, providing a “$20-billion tax savings to Bezos’ business” (p. 80). He then successfully lobbied the Congress and got President Bill Clinton to sign the Internet Tax Freedom Act in 1998, which prevented “any government imposing Internetspecific taxes”, which led by 2015 to “wiping out the local bookstore, and to some extent the local record store from the American landscape”. Ironically, as people like me prefer to browse in bookshops rather than receive recommendations from Amazon, it has “decided to go into the bookstore business itself”. (p 80)

Are Facebook and Google merely platforms? No, because, as President Barack Obama’s economic advisor Peter Orszag argued, both “are monopolies that are using our personal information without paying us and extracting a monopoly rent by selling ads based on that personal information”. Both are in fact ad agencies. Google made $60 billion in 2015 from its targeted advertising. But these monopolies have not been subject to US anti-trust laws as the Fair Trade Commission has accepted the argument that (as its current acting chair put it) “given the clear consumer benefits of technology-driven innovation, I am concerned about the push to adopt an approach that will disregard consumer benefits in the pursuit of other, perhaps even conflicting, goals.”(Rana Foroohar, FT, 17 September 2017). But the recent “$2.91-billion fine against Google for allegedly abusing the power of its dominant search engine” by the EU might signal that the political worm might be turning (“Tech firms are facing political pressures”, WSJ, 18 September 1017).

The most egregious faults of the social media platforms (including Twitter and YouTube) are the avenue they provide to terrorists, criminals, pirates, hate groups, and the purveyors of “false news”. “In 2015, ISIS supporters had over 46,000 accounts on Twitter, and posted 90,000 tweets a day. In 2013 there were more than 35,000 ISIS videos on YouTube”. The platforms hide behind the First Amendment right of free speech to permit this, as their business model requires “the maximum number of users and maximum numbers of posts. YouTube has even gone so far as to place ads on ISIS videos”! (Taplin, p 183-4).

I have discussed the political and civilisational damage that social media is perpetrating in an earlier column (“The Decline of Civility”). What can be done? For those platforms which are rather like newspapers or other media on which people can express their views, anonymity must end. Everyone posting anything on social media should be identifiable, and made subject to the same laws of libel, hate speech, and false claims which the Common Law allows in the UK, the US, and India. Anonymity has been lauded as a means to organise resistance against despotic regimes. But as the Arab Spring and China’s Digital Firewall show this is increasingly an idle dream, whilst allowing various anti-social elements to threaten us and vent their spleen.

Finally, privacy remains the most important issue. The Supreme Court has established it as a fundamental right in India against the tech and government lobbyists of Aadhaar. There must be a way to reverse the default position of giving personal information (to one where active acceptance is required) for the provision of services provided by both governments and companies. This data must always belong to the individual, which the platform must take down if requested.

The EU has gone the furthest in its Data Privacy Regulation coming into force next year. “The European Commission has estimated that by 2020 the value of citizens’ personal data will reach 1 trillion euros, almost 8 per cent of EU GDP”. It is planning to reclaim this through Decode (Decentralised Citizens Owned Data Ecosystem), with individual users and communities creating “a true sharing economy, a data commons”. But given the failed history of past EU sponsored grandiose tech projects, John Thornhill has argued ( FT, 19 September) “what would catalyse a true transition is if a leading tech company were to help redesign the digital economy by enabling users to control their own data”. His candidate is Apple which uses its data “to build better products rather than to sell on to advertisers.” Till this happens the liberal democracies need to devise and enforce Bills of Digital Rights as outlined by Allister Heath ( Daily Telegraph, 14 September) to counter the predatory instincts of both digital companies and governments, which are converting platforms into instruments of illiberalism.