The economics of platforms in the digital transformation: ARCEP views - An interview of Sébastien SORIANO, Chairman of ARCEP for Communications & Strategies n° 99 (5 october 2015)
C&S: There is a hot policy debate today in Europe on whether we should
regulate platforms. Some argue in favor of a "laisser faire" approach,
because due to strong innovation dynamics, they say, the dominant platforms
of today will soon be replaced by new players, in a Schumpeterian fashion. Others
propose to strongly regulate platforms, in terms of neutrality, portability
of data, access, etc. Where do you think lies the right level of regulation
Sébastien SORIANO: Whether or not an economic activity should
have specific regulation is a matter of two cumulative factors: an economic
factor (are there market failures?), and a political one (is this activity having
a structural impact on our society and economy?).
There is no single answer for all platforms, because the term "platform"
covers a great variety of actors and models: e-commerce platforms, social networks,
search engines, application stores… The fact that the European Commission
is currently investigating on whether Uber is a transport service or a digital
platform is actually a striking example of the lack of a consensual definition
of what a platform is.
In my opinion, it is obvious that some digital platforms have today acquired
such a significant influence over multiple segments of our economy that some
kind of regulation is needed. But defining specific economic rules for every
type of platform would be inappropriate: it would risk numbing the innovation
process without bringing any added value, not to mention the potentially high
cost of such a regulation.
In the end, the question is whether we should regulate only a handful of major
platforms. I believe that such a regulation would help promoting confidence
in the digital economy and thus fast-tracking the development of those markets
If platforms, or some platforms, should be regulated, what kind of regulation
should be put in place? In other words, what kind of market failures calls for
a regulatory intervention? Going further, which form of intervention do you
think is preferable: ex ante regulation or ex post competition policy?
General rules already exist in consumer, commercial, competition or privacy
laws. The Booking.com case, dealt in France by the Autorité de la concurrence,
is an illustration that the current legal tools are often sufficient. The real
debate today is whether we need ex ante regulation, that is to say a specific
regulatory framework adapted to a certain category of platforms.
To build such a framework, three essential values will be needed in my opinion:
- First, regulation must have the ability to react quickly: the general law
provides some answers, but the response times are often totally ill-adapted.
Disputes between a platform and a startup or an SME should be settled in no
longer than a couple of months.
- Second, the framework must be an agile one: strict and detailed rules would
indeed soon become outdated, or simply be bypassed by some actors. Regulation
should be articulated around a few general principles, with a regulating institution
in charge of ensuring the applications.
- Finally, regulation must form an alliance with the multitude: the digital
economy is a complex and shifting sector and regulation must take shape with
the help of researching communities, programmers, makers... We need to invent
the concept of "crowd-regulation".
The economics literature on platforms and two-sided markets shows that
applying insights from the analysis of one-sided markets to two-sided markets
might be misleading. For example, we know that it may be profitable (and socially
optimal) for a platform to charge a very low price on one side to generate strong
network effects for the other side. With "one-sided" glasses, such
a price may look predatory, whereas with "two-sided" glasses, it could
be viewed as just efficient. How can regulators account for these specificities
of two-sided markets?
Infrastructure regulation has existed in France for close to 20 years, and
has been applied to a great variety of sectors: railroads, energy, communication...
The fundamental issue has always been to deal with network effects, a phenomenon
that allows the largest network to constantly reinforce its dominant position.
Regulation allows our society to benefit from the positive consequences of these
network effects, while minimizing the drawbacks.
The notion of two-sided markets, with cross network effects, is only a refinement
of those concepts. Of course, some of our regulation tools will need to be adjusted
to the stakes and the specificity of those markets. But the fundamentals are
the same, and the issue at stake is to regulate our digital economy's main foundations.
There is at least one area of friction between telecoms and platform markets,
which is the competition and/or complementarity between telcos and over-the-top
(OTT) players. Can telecommunications regulation have a role in securing a level-playing-field
between telcos and OTTs?
Whether it is as a client, a supplier or a competitor, every company subjected
to some form of regulation fears having to deal with Internet players who don't
play by the same rules. Because there are specific rules in their sector, this
is especially true for the telecom or the media industry. Part of this fear
is entirely justified: real issues are at stake, especially when telcos and
internet players are in direct competition.
However, we won't solve anything with downward alignment or total deregulation:
a new balance must be established, and, in my opinion, part of the solution
is precisely to be found by building a framework for platform regulation.
A related topic is net neutrality. What is the current status of net neutrality
regulation in Europe and in France?
The Internet has become a crucial collaborative space, tremendously important
for all our society and economy, and I believe it must now be considered as
a common good. The risk today is that some companies manage to distort this
essential tool for their own profit and against the interest of other users.
This is not science fiction or paranoid delusion: some essential privately-controlled
bottlenecks have indeed emerged, and without appropriate regulation, there is
a real threat to see some kind of privatization of the Internet.
Net neutrality rules precisely aim at preventing a specific category of actors,
the telecom operators, from doing so. An ambitious set of rules on net neutrality
is in the process of being adopted in Europe. The European framework will be
very protective and will rely on guidelines to be issued by BEREC. ARCEP will
contribute actively to these works and will be in charge of its application
But if we really want an open Internet, we also need to prevent a situation
where a few Internet giants could take advantage of their current position to
dictate their own rules to the World Wide Web. This should be a necessary addition
to the net neutrality framework, and without it, the job would only be half
done, or maybe even less. Ask yourselves: what actors are the most worrying
for the future of the Internet?
Platforms are global players, whereas telcos are usually attached to a
local market. Is it possible to regulate platforms at a national level, or should
such regulation be supra-national?
The correct level to construct tomorrow's regulation is obviously the European
one, and this work is currently underway via the Digital Single Market initiative.
But each member state has the responsibility to contribute to this reflection,
and I believe it would be appropriate to act first on a national level in order
to better observe, understand, compare and assess actor's behaviors in platform
I would however advise against going too far on a national level. Only with
a European solution can we avoid a discrepancy of treatment between member states.
Moreover, a European solution would be more legible for actors, and we need
this legibility if we want actors to invest in innovation in Europe.
Digital platforms, and the digital economy in general, raise new regulatory
challenges. Yet, the nature of those challenges, and the potential harm for
our society remains poorly understood. France mustn't underestimate the complexity
of the issues, and we should give ourselves the means to accumulate the necessary
experience and expertise to participate in the debate.
One possible concern in platform markets is that due to the strong dominance
of one firm or a few firms, competition might not emerge. What can be done to
protect the innovation process and potential entry by new (European?) players?
This ultimately comes back to the issue of dealing with network effects that
participate in locking dominant positions over some markets. One of the challenges
for every regulation is to bypass those effects in order to maintain an open
competitive game. There is no single right answer but the solution typically
lies with regulatory tools such as portability, interoperability, open format...
Another crucial aspect is the matter of vertical integration: in the last few
years, some Internet giants have been developing new activities related to their
core-business and have constructed entirely closed ecosystems. This is not a
problem in itself, but it is imperative that this should be done in a loyal
manner, without the dominant actor leveraging its position to stifle competition
on other markets.
Similar problematics have been dealt with very strong remedies in the past:
structural separations were put in place in railway and electrical companies,
and some companies were even dismantled. This is not to say we should go that
far in platform markets. Most likely, platform regulation can bring more subtle
remedies, adapted to platform specificities.
Sébastien SORIANO was appointed Chairman of ARCEP (Autorité de
régulation des communications électroniques et des postes) on
15th January 2015, for a six-year term. Born in 1975, Sébastien Soriano
is a chief engineer from École des Mines (the French national school
of mining engineers) and graduated from École Polytechnique. He then
spent most of his career in competition and telecoms regulation. In 2012, he
was Head of Fleur Pellerin's cabinet, the then French Minister for SMEs, innovation
and digital economy. Prior to his appointment at ARCEP, he was Special Advisor
to the French Minister for Culture and Communication.
Conducted by Marc BOURREAU, Telecom ParisTech