October 12, 2017

If Platforms are Monopolies, Data is the New Oil

A Review of Platform Capitalism by Nick Srnicek

A decade ago, it was not difficult to find exuberant claims for the internet as the engine of a new kind of economy. Some called it the sharing economy, others described it as grassroots or by other names. The point was that several centuries of industrial capitalism, kept in place by gatekeepers who sternly guarded hierarchies and access to resources, could be overturned by the radical power of peer-to-peer connections and open collaboration.

That exuberance has since been tempered by the astonishing growth and reach of Google, Amazon, Facebook and others and the discovery of their power—intended and unintended—to play a powerful role in national elections , policy , commerce and, in the view of one author, pretty much everything.

Today it is not difficult to find concerns over whether Google and its peers are competition-killing monopolies that should be in the sights of regulators in the United States and elsewhere.

Platform Capitalism, argued in pithy enough form to read on a long plane trip, cuts into this debate in an incisive way. In author Nick Srnicek’s view,  we can best understand digital platforms as continuing on the basic path set out by capitalism, and driven by the need to maximize profits to repel competition.  But Platform Capitalism isn’t only interesting as a contribution to the debate about the nature of the digital economy, but for its lucid and thought provoking arguments about how digital platforms work in the first place.

Whether you agree with his conclusions or not, Srnicek’s focus on the function of data as the basis for platform’s competitiveness is striking.  And, as he concludes, we should all understand how platforms work, as their deep reach into our lives and businesses grows ever deeper.

Data is the new raw material

One of the key ways that Srnicek makes his case is by likening the data required for the functioning of the digital economy to the raw materials required for industrial production.  Marketers for digital platforms often use images of data as a kind of immaterial ether, frictionlessly oiling our social and commercial transactions.

Srnicek brings us firmly back to earth by reminding us how energy intensive it really is to extract data—“information that something happened”— from its natural source, which is the activities of users. Like iron, gold, or timber before it, data requires various kinds of machinery to capture, store and refine it before it can be used.

This was once expensive. But as the costs of capturing data fell in the early 21st century fell, another challenge kicked in. Despite the plethora of data being produced, businesses could not make good use of it. For that, they would need a new business model.

Digital Platforms: A New Business Model for Exploiting Data

Thus arose the digital platform:”A digital infrastructures that enables two or more more groups to interact.”  This business model was designed precisely to gain benefit from the capture and analysis of data, whether by converting goods into services for higher returns, coordinating workers or via other functions.

There are in Srnicek’s taxonomy five types of platforms, each profiting from data in a distinct way:

  • Advertising platforms  like Googleand, Facebook. Extract information on users, analyze it, use products to sell ad space
  • Cloud platforms such as Amazon Web Services (AWS), Salesforce and Alibaba.  These companies own both hardware and proprietary software, which they rent out as services to other companies. They also collect data in the process, which helps them optimize their services
  • Industrial Platforms such as GE and Siemens, which build hardware and software that render traditional manufacturing as internet based processes
  • Product platforms such as Rolls Royce and Spotify which exist on other platforms and turn goods into services, then collect subscription fees or rent on those services
  • Lean platforms such as Uber and AirBnB differ from other platforms in that they do not own any assets except for the software and analytics of the platform itself. By reducing their costs to a minimum and establishing themselves as a critical platform for particular kinds of interactions (getting a taxi, finding a hotel room), they maximize their ability to extract rent.

The Big Takeaway: Platforms Want to Be Monopolies

There are several key takeaways from Srnicek’s analysis, but the basic fact driving all of them is that data is a critical factor in competitiveness, and as a result platforms relentlessly seek to capture and monopolize it.

(1) Platforms are monopolies. One of the chief reasons for this is the phenomenon called network effects: The more users that interact with a system, the greater value it holds for each user, making it more appealing. Facebook, for example, gets more valuable for each user, the more users it has. This makes platforms very difficult territory to encroach on.

(2) Platforms change the form of competition. The traditional measure of competitiveness—the widest possible gap between costs and prices—is not the only measure for platforms. Their competitiveness also relies on the amount of data they collect and analyze. As a result “if these platforms which  wish to remain competitive, they must intensify their extraction, analysis and control of data — and they must invest in the fixed capital to do so.”

(3) As a result of their insatiable need for more data, appeals to companies to curtail their invasion of privacy on their own recognizance is a fruitless endeavor. In Srnicek’s words,  the “suppression of privacy” is at the heart of what platforms do.

(4) Platforms do seek to position themselves as gatekeepers but in a new way that Srnicek characterizes as “rhizomatic connections driven by a permanent effort to place themselves in key platform positions” that enable them to scoop up data before their competitors. For example, platforms unable to displace Google’s dominant position as a search engine may integrate search into their own apps in order to capture the data that might otherwise go to Google.

(5) Siloed or enclosed platforms also result from the competitive need to gain more data: “this approach tires to tie users and data to the platform by locking them in through various measures: dependency on a service, in a ability to use alternatives or lack of data portability.”  Amazon and Facebook both seek to keep people from ever leaving their platforms for the ‘open internet,’ but rather performing searches and other activities within their systems; dominant industrial platforms may make switching costs punitive for non-platform companies and the rise of apps, which are naturally closed off from the open web, is also a sign of silo-ing.

Should Platforms be Collectivized?

In the final analysis, readers are left with the relatively bleak view (unless we own a platform) of a future of enclosed platforms with limited public access, in a world with few tools to break up their monopolistic tendencies.

Srnicek lists various ways the state can intervene to limit the power of monopolies and in fact, most of the activities he lists occur now — from the UK effort to rescind Uber’s license to operate in London, to data protection laws in Europe.  But he admits that these regulatory routes are unimaginative.  A more adventurous proposal is to create “public platforms — platforms owned and controlled by the people,” and capable of using data to generate benefits to them as well, in forms like resources and democratic participation.

This is not unfeasible.  In 2016, the European Commission launched the Next Generation Internet initiative to define an internet of the future built around the needs of humans. It is currently in a multi-year set of consultations and projects that will “shape ths future internet as a powerful, open, day-driven, user-centric, interoperable platform” that reflects “European social and ethical values” of freedom and openness.

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