There has been a pronounced monopolization trend for the digital network market. Social media networks or digital networks due to their network effects operate with significant scale and scope economics and low distribution cost. These contributing factors help social media network operators to create high entry barriers for subsequent entrants to succeed. Absence of viable competitors is central to monopoly.
The Competition Act, 2000 of India defines monopoly as that of a dominant position of an industry which excludes viable competitors. The Act uses the term “an appreciable adverse impact on competition” and seeks to investigate into a possible appreciable adverse impact on competition having regard to a set of factors like entry barriers, foreclosure of competition, market share of the enterprise, size and resources of the enterprise, size and importance of the competitors, economic power of the enterprise including commercial advantages over competitors, dominant position, market structure and size of market etc.
Using the scope of the above construct to define monopoly, it may be useful to examine if the social networks exhibit any characteristics of monopoly.
Dominance is a position of strength enjoyed by a company. Market share is traditionally used as an indicator. The market for social networks is highly dynamic because of short innovation cycles. Thus, many other cogent indicators like economies of scale, barriers to entry due to large size and control of infrastructure can be relied on. The dominant position is investigated by abusive conduct like unfair prices, unfair conditions, limiting production, technicalities to the disadvantages to the users, applying different conditions to different trading parties, subjecting contracts to supplementary obligations.
Although social networking platforms have made some attempts to enable the users to transfer their data to competing networks, there are considerable limits on direct transfer of data to other platforms. This creates switching costs due to which customers remain locked-in to a given platform. Data portability enables the users to move data from one network to another cloud storage without being made to download to their devices, save them and again upload to another platform.
A much-publicised case example available in the literature is that of telecommunication. Drawing from the oft-quoted case of early days of AT&T which built its monopoly by refusing to connect independent local phone companies. Local phone companies had lower value because of their inability to connect the users to the large network and because of the dominant position of AT&T, the small local operators succumbed to by selling themselves to AT&T.
Twitter bought Vine in 2018 when its application used to run on top of Facebook. Vine allowed its users to post videos and share them with their Facebook friends. Eventually Facebook cut off Vine’s access and Vine failed. Facebook clearly saw Vine as a potential competitor and knew that without access to Facebook’s larger network, Vine would not survive. Facebook’s argument to cut off Vine that it was a duplicative effort was similar to AT&T’s opposition to interconnect. Interoperability in the telecom carriers broke the network effect and hence curbed monopoly.
Often the costs of interoperability are often advanced as an argument against interoperability but the researchers argue that there has been no cost to interconnection in the digital platforms. No separate standard is required.
Transferring digital files has no significant additional costs as network operatives do transfer files to their users. The only cost is redesigning the format of transferring data. The real cost of interoperability to a network operator is the fear of losing customers as entry barriers would fall.
Another argument cited is that interoperability would cause less innovation. On the contrary, interoperability would increase competition and the operators would be under competitive pressure to enhance user experience.
Social networks play an important role in society. They do deliver substantial digital utilities and therefore allowing a social network operator to use its monopoly power is fraught with serious implications. A country like India high in growth trajectory cannot be made vulnerable to the monopolistic design of social networks. The consequences of a dominant social network cutting off India are too grave to ignore. There is considerable scope of application of abuse of the dominant regime by the existing social networks.
The existing competition law comes into operation on an ex-post basis after an abuse has occurred. I.e., laws in general are effective on an ex-post basis. Hence regulatory intervention is a credible instrument which is not limited to situations in which dominance abuse is established. The scope of regulation is potentially much wider than the scope of competition law. Regulatory intervention for data portability may be a more effective instrument although the boundaries of portability may be wide and hence may call for wider consultations.
There are overlapping issues of privacy and intellectual property as well. Finally, there are requirements of technical standards of portability. The imposition of regulatory requirements of interoperability between social networks will redress the network effects that are present in the present market. Network effect will not remain limited to a specific social network anymore if several platforms are interoperable. Users of multiple networks will be benefited and increase the competition in the market by reducing the switching cost and user lock-in.
It is high time for the Government to address the problem of interoperability of social networks and achieve the ultimate goal of ending what is called the” Walled Garden” that currently dominates the social networks ecosystem.
This article first appeared in ET Government, https://government.economictimes.indiatimes.com/news/policy/opinion-its-high-time-for-regulatory-intervention-to-tap-monopolistic-growth-in-social-platforms/90762889