Daniel O'Connor

The unintended consequences of well-meaning regulation is a theme we discuss frequently here on DisCo.  (Note: This is different than cynical, anticompetitive regulations that are pushed under the guise of well-intentioned “consumer protection”, which is another recurring DisCo topic.)

In that vein, I filed comments on behalf of CCIA discussing the potential impact of new proposed regulations by the Department of Transportation aimed at requiring airlines to disclose the full cost of travel up front (instead of playing hide the ball with a litany of added fees).

The aim of this rulemaking is noble and economically sound. Econ 101 tells us that competition works best when certain conditions are present.  One of those conditions is that “perfect information” is available to consumers and producers.   The principle is that markets work best when everyone involved knows the full price up front and can assess their options before purchasing.  (Obviously, “perfect” is an ideal on one side of a continuum.)  In fact, this is an area where all sides of the political spectrum should agree — at least in theory.  Narrow rules that increase pricing (and quality of service) transparency would help the free market work better, and decrease the need for regulation, as consumers would be better able to discipline market participants with their consumption decisions.  In English that translates to: if airlines are screwing consumers on price or quality, and consumers know that up front, they can purchase a ticket on another airline, making that airline less likely to screw customers.   Hence, the “disciplinary power” of a well functioning market.  (Now, it is an entirely different debate as to whether the airline market is competitive enough given the recent wave of airline consolidation and the market’s unique structure, but that is an argument beyond the scope of this post.  No matter how competitive that market is right now, it is difficult to argue with the contention that better pricing information up front will make it work better.)

However, while “open data” is a good thing, regulations that go further than requiring a standardized output of raw data, governing how data is displayed by third parties, would be unwise.  As the growth of the Internet economy has illustrated, the packaging and display of information to consumers is an important sector of economic activity where new participants and innovation currently abound.  Locking in a particular type of display or presentation would slow growth and harm competition in the metasearch market.

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In June, when I wrote about the release of Amazon’s new smartphone, I promised a more comprehensive article about the competitive dynamics of the mobile ecosystem.  While tech journalists tend to fixate on new releases from household name companies such as Amazon’s Fire Phone, it is all too easy to miss the big picture.  Emerging markets pose the biggest threat to the current market leaders and promise to be incubators of disruptive innovations.

Although much of the focus in the developed world remains on the competition between Google’s Android and Apple’s iOS, a host of plucky competitors are targeting emerging markets.  And for good reason.  Not only is the smartphone adoption rate growing nearly twice as fast in emerging markets as it is in more established markets, certain characteristics make it easier for new platforms to establish a foothold in emerging markets, as the market research firm GSMA Intelligence stressed in a recent report:

Emerging markets represent the largest unrealised source of new mobile Internet subscribers.  Given that smartphone penetration is nascent, the take-up and use of mobile data is rising, lock-in mechanisms have yet to kick in for incumbents and subsidies are less prevalent, the markets present more fertile ground for challenger platforms.

In a nutshell, the advantages held by established competitors like Google and Apple don’t necessarily carry over into emerging markets.  The market structures and desired uses of mobile technology differ greatly in markets such as China, Vietnam and India than from those in the US, Europe, Japan and South Korea.

The most obvious reason for this is simply that the smartphone penetration rate is much lower in emerging markets, therefore less people are committed to a particular mobile platform.  Furthermore, characteristics such as price point and unique local content and services are the more important considerations for new users in those markets where lock-in factors, such as prior purchases, subsidized contracts and large mobile app suites, don’t factor in purchasing decision to nearly the same extent they do in more advanced markets.  Low price and local market customization are areas where smaller competitors can compete against industry leaders.

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DisCo readers may be familiar with a recurring theme pitting incumbents versus disruptive innovators. But new research seems to suggest that the relationship isn’t always adversarial.

The Knowledge@Wharton blog has an article about a soon to released paper by three professors, David Hsu, Matthew Marx and Joshua Gans, which illustrates that disruptive startups do not just compete with market leaders, but often partner with them as well.  The authors use the automated speech recognition (ASR) market as their test case, as the frequent technological disruptions in the field make it a paradigmatic industry to study; similar to Clayton Christensen’s disk drive market.

The study finds that 60% of the firms in the ASR market started out competing in the marketplace while 38% cooperated with market leaders (2% had a “hybrid” approach).  However, the blog notes that breaking it down by firms using a “disruptive” approach versus an “existing technologies” approach tells a slightly different story.

The researchers find that early adopters of disruptive technology were much less likely to cooperate with incumbents, with only 21% doing so, compared with 36% of start-ups whose businesses were based on existing technologies. But early adopters or disruptors were more likely to switch from a competitive to a cooperative strategy: 12.7% did so, versus 7.8% for non-disruptors. (The switch from a cooperative to a competitive strategy was not meaningfully different between the two groups.)

The authors use their research to give advice to startups: be open early on to the possibility that your competition/cooperation strategy could change over time.

The study’s authors also have advice for incumbents: it may be useful to let the disruptive startups slug it out among themselves and license/acquire/partner with the winner, rather than trying to develop the disruptive technologies in house.  As one of the authors of the study notes, predicting a winner is difficult:

You sort of have to predict the future. What we’re saying is, you don’t have to predict the future. There may be 30 start-ups out there trying different disruptive or potentially disruptive technologies. So, you can take this wait-and-see approach.

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Two weeks ago in Facebook’s Q2 earnings call, Mark Zuckerberg reiterated Facebook’s desire to become a more effective online “search” competitor, although in his description of the initiative it became clear that he was talking about becoming a more effective competitor in the “market for answers,” as the Wall Street Journal pointed out:

Facebook is trying to give people answers to what they’re looking for in hopes they’ll spend more time on the site or in the app, and in turn stealing searches away from Google or Microsoft’s Bing.

In fact, responding to an analyst’s question, Zuckerberg cited Facebook’s unique advantages in the answers market:

There is huge potential. There are a lot of questions that only Facebook can answer, that other services aren’t going to be able to answer for you. We’re really committed to investing in that and building out this unique service over the long-term. And I think at some point there is going to be an inflection where it starts to be useful for a lot of use cases. But that may still be years away. But we’re just committed to doing this investment and making this right.

Given our frequent musing here on the nature of competition online and its antitrust implications, Zuckerberg’s description of where Facebook is going was telling.  Namely, that the narrow market definitions that rely on colloquialisms (“search engines” and “social media”) do not reflect the true nature of competition online.

A fundamental tenet of antitrust law is that in order to figure out if a company is monopolizing a product market, one has to define what that relevant product market is.  Sounds simple enough, right?  Well, maybe not, especially in the online world.

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Back in March, I blogged about a slate of competition accusations that had been leveled at the Android mobile operating system.  Although I am not going to rehash my initial arguments here, I wanted to point readers to a recent paper by Dr. Torsten Körber, which analyzes the same claims and comes to similar conclusions (including noting that both the US FTC and Korean antitrust regulators examined the Android ecosystem as part of their antitrust reviews of Google’s practices and found no cause for concern).

Given that this is a blog, and not an academic journal, I’m not going to analyze Körber’s entire paper (although I recommend it to anyone interested in a deep dive on these issues), but instead point out a few interesting takeaways from it on the nature of competition in the mobile ecosystem.  Specifically, I will focus on how the mobile market is different than the PC market, as much of the current high-tech antitrust thinking and analysis is influenced by prior landmark antitrust cases, not least of which being the Microsoft cases.

1) The mobile market turns over much faster than the PC market

In the mobile world, turnover of devices is much faster.  Although it varies by country and manufacturer, it is very common for consumers to replace their smartphones every year, or every other year.  Compare this to the PC world, where — as Körber points out — Windows XP still has nearly a 30 percent share, and it was released in 2001!

So, what does this mean for antitrust/competition analysis?  It means that market power is more difficult to come by and market share is more ethereal than in the PC market, as consumers are continually faced with inflection points where they reevaluate their choice of handset and mobile OS.  Whereas if the average consumer replaces his or her computer once or twice a decade, then market power is more permanent and market share changes are much slower.  This partially explains the ephemeral nature of the leading smartphone and mobile OS makers over the decade, which is illustrated by this quote from comScore market research highlighted in the paper:

“In 2005, the market was dominated by Palm, Symbian and BlackBerry. However, by the following year all three had ceded control to Microsoft as the new market share leader. 2008‐2010 saw BlackBerry stage a comeback to assume the #1 position before eventually giving way to the upstart Android platform in 2011”.

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Last week, the head U.S. trade negotiator, Ambassador Michael Froman, delivered a speech addressing the Trade in Services Agreement (TiSA).  What got my attention was the prominence that the Internet and Internet-centric commerce received in the speech.

Although this might seem like common sense given the immense role that the Internet plays in international commerce (particularly trade in services), the international trade regime has been slow to embrace this technological revolution.  As I have written before on this blog, Internet trade has traditionally received relatively short shrift from traditional trade negotiators.  However, at least in the U.S., that trend is changing.

[As an interesting aside, watch this presentation by J. Bradford Jensen to get a better understanding of the importance of trade in services to the U.S. and global economy.]

Before I chronicle the USTR’s evolution on Internet-enabled trade rhetoric and action, I want to throw out a few recent examples of why trade negotiators — in the U.S. and the rest of the world — should focus on facilitating a free and open Internet if they want to help consumers and global commerce.

At the risk of stating the obvious, I need to lay out the keystone fact up front for the purposes of my argument:  the Internet has an enormous positive effect on international commerce: particularly for small businesses.  The Boston Consulting Group estimates that the G-20’s Internet economy will be worth $4.2 trillion by 2016 and that more than one-fifth of the growth of modern economies from 2007-2012 is attributable to the Internet.  These effects are predicted to significantly increase as Internet penetration grows in the rest of the world.

For major U.S. Internet companies, international markets have become increasingly more important.  And the potential for international competition has become more robust.  In the latest installment of Mary Meeker’s routinely fabulous annual report on internet trends, she documents this phenomenon.  While nine out of the top ten “global Internet properties” are made in the U.S.A., 79% of their users come from outside the U.S.  Compare this to 2005, when Google’s total international revenue was 39% of its overall sales.  Now, 56% of Google’s revenue comes from overseas.  For Facebook, it is a similar story.  Currently, 86 % of Facebook’s users are international, while less than 50% of Facebook users were international as of 2008.

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Amazon entered the smartphone scene in a major way today with its much hyped Fire Phone.  Although technology reviewers are furiously picking over the products new specs, such as its 3D screen, 13 megapixel camera and the dynamic perspective technology, I wanted to step back and examine how the tech embedded in this phone can accelerate the disruptive innovation already taking place in the tech ecosystem as we speak.  One particular feature of the phone deserving attention is the Firefly technology, which allows users to use their phone’s camera and microphone to directly identify objects, products, movies or songs in the real world and take actions based on that recognition.

I will take a more detailed look on what Amazon’s entry means for competition in the smartphone world in a follow up post, but without further ado, here are some disruptive aspects of the new Amazon smartphone:

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The Wall Street Journal published a story today on Facebook requesting that the European Commission, not individual domestic competition regulators, review its recent transaction to acquire WhatsApp.  The announcement came as a surprise as the acquisition already sailed through U.S. approval and, as the WSJ points out, the EC “wasn’t expected to review the deal because the acquisition is unlikely to materially boost Facebook’s revenues.”

Although Facebook’s request might seem strange on the surface, it follows on the footsteps of political pressure from European wireless companies to oppose the deal.  Given that these companies are powerful political forces in their respective states, fighting for merger approval in many individual countries against politically powerful local incumbents doesn’t seem like a great proposition.

As the WSJ notes:

European telecom executives have nevertheless railed against what they describe as the assault by so-called over-the-top companies that they believe are competing unfairly against traditional phone companies. At a conference in Brussels last month, some lambasted the EU antitrust agency’s perceived lack of interest in the WhatsApp merger.

It’s pretty clear why telcos are opposing this transaction.  Combining WhatsApp, which has “been hugely disruptive to the [telco’s] traditional text messaging business,” with a well-heeled market leader with a huge user base promises to make the new combination a stronger competitor for the telcos.  Therefore, it is not surprising that the telcos are pushing back: consumers saved $33 billion in texting fees in 2013 alone thanks to WhatsApp and similar messaging applications.  The problem for telcos: that savings came out of their pockets.  The other problem for the telcos: the very purpose of the European Commission’s competition policy is consumer welfare, not incumbent revenue protection.

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Despite being popularized in the 1990s by AOL Instant Messenger (AIM), instant messengers are becoming retro cool, especially if you are are global tech company with a couple billion dollars in cash on hand.  Besides (or possibly because of) the $19 billion that Facebook paid for WhatsApp and its 450 million users, other instant messaging platforms have been put on the auction block recently as well.  Most notably, Rakuten, a large Japanese e-commerce and Internet company, spent $900 million buying Viber, a four-year-old cross-platform instant messaging application.  Also, Alibaba, the Chinese e-commerce heavyweight, invested $215 million in the parent company of Tango, another instant messaging newcomer, to acquire a minority stake in the Mountain View-based company whose messaging product has 200 million registered users.

What’s going on here?  Why are instant messengers all the rage in an era when the cutting edge of technology consists of driverless cars, supersonic ground transit via pneumatic tube and elevators to space?

The tales of America Online (AOL) and Tencent shed some light on the recent popularity of instant messengers, and they also provide case studies in some of the finer points of disruptive innovation theory. MORE »

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At the end of 2013, Project DisCo hosted its first physical world event, The Disruptive Competition Policy Forum.  Over the next few days, we are going to post the videos of the great panels and keynotes here.

Details below. MORE »

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