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A Neutral Economy?

· February 12, 2015

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It isn’t always necessary for catchy phrases to have a clear meaning, after all poetry as an art form depends on beauty and a certain mystery. Mario Cuomo famously quipped that in politics ‘You campaign in poetry; you govern in prose’. While there is much merit in this claim, the poetry must lead you in the right direction otherwise the outcomes will not be what has been claimed.

This is the case with the current European debate about “platform neutrality”: a seductive phrase, but with a true meaning few have considered.

The most recent winner of the Nobel Prize for Economics, Jean Tirole, has written extensively about ‘platforms’ or two-sided markets. Such markets include newspapers, shopping centres, estate agencies, video games, credit cards, TV networks and many more.  A market is two-sided when it brings together two-distinct groups, through a platform or intermediary, that benefit from each others’ existence.  Ebay buyers benefit from having more sellers (and sellers benefit from more buyers), stores in shopping malls benefit from more shoppers and shoppers benefit from more stores, and Xbox video game developers benefit from more Xbox owners (and vice versa).  The company the creates the platform (whether it is a online website, the seller of a video game platform, or the owner of a shopping mall) makes money by creating value for the other parties in the system.

The platform company often creates (or facilitates) a market. What is notable is that the “platform neutrality” discussion doesn’t recognize, as Tirole does, that these situations occur throughout the entire economy. As Tirole notes, “[m]any if not most markets with network externalities are two-sided.”  Instead, the “platform neutrality” debate only focuses on famous online platforms such as Apple, Allegro, Amazon, eBay, Facebook, Google, etc, and fails to recognize that these platforms are not unique to the online world.

That misses a crucial point. If you agree with the idea that there is no longer such a thing as a separate digital economy, rather an economy that is digital, then focusing the “platform neutrality” discussion on the new digital-only firms makes little sense. Digital platforms are now in all sectors of the economy from cars to publishing and supermarkets to travel agencies.  Furthermore, platforms exist in the offline world as well.  Newspapers, for one, offer reduced prices for subscribers (which sometimes includes free distribution) to encourage higher readership, which allows them to charge more to ad buyers.  In economic terms, they have created a platform to connect potential consumers with advertisers.

Given this, what does the idea of platform neutrality actually mean?

What does a ‘neutral’ publishing platform look like for example? Would this mean no party political or religious affiliation for newspapers? No discretion in who can and cannot advertise in a publication? Applied in a pure form this is clearly ridiculous.

As cars rapidly become connected they are becoming ‘platforms’ where owners are connected to different services and apps. In-car systems will perform functions from maintenance to entertainment. Would a platform neutrality obligation mean that a BMW must open its platform to any app, regardless of safety considerations? Rogue apps might hijack a car’s systems and have clear safety considerations, regardless of BMW’s commercial preferences. Recent news about General Motors shows this is no longer hypothetical.

As digital platforms proliferate, a universal neutrality obligation for platforms would actually mean a neutral economy, with firms unable to differentiate as they must treat all suppliers and sellers equally. Do we intend an end to the market?

In fact, those who call for platform neutrality may well be (i) calling for platform regulation, an intervention of some kind to hobble a more nimble rival or (ii) focussed on a specific relationship between platform and third party. It is vital to separate these situations to begin to have a sensible discussion, let alone consider the pros and cons of some kind of intervention.

A strategy for an economy that is digital needs to encourage all parts of industry to take advantage of the digital opportunity. Differentiation and meeting consumer need will be as important to success as they have always been.

The good news is that in an economy that is digital the barriers to entry are much lower, and competitive pressures much greater. Should a situation develop where consumers cannot access the services they want, and in which innovation suffers, competition enforcement remains at hand.

To take Dylan Thomas completely out of context, if we in the EU do not want our economy that is digital to ‘Go Gentle Into That Good Night’, we must not ignore the fact that a neutrality obligation for platforms would apply across the economy, thus crippling the innovation capacity of our innovators. In a neutral economy, there is no differentiation. We would do well therefore to heed Jean Tirole, and other practitioners of the ‘dismal science’, and remember: it’s complicated.

European Union

DisCo is dedicated to examining technology and policy at a global scale.  Developments in the European Union play a considerable role in shaping both European and global technology markets.  EU regulations related to copyright, competition, privacy, innovation, and trade all affect the international development of technology and tech markets.