Regulating Platforms

Over the past few months, there have been a lot of disputes between platform businesses, governments, and a lot of these have gone to courts as well. Last Friday (26 August 2016) issue of the Mint newspaper carried an opinion piece titled “the tricky business of regulating disruptors” (read it here). The editorial while labeling almost all platform businesses as disruptors, just stopped short of calling all of them disruptors. In this blog post, I dig deep into the issue of if and how platform businesses need to be regulated with respect to consumer protection, without impeding innovation and thence providing fair business opportunities to businesses (and returns to investors).

Defining the industry boundaries

One of the key determinants of “competitive” behavior is the definition of the relevant industry. What is competitive and what is anti-competitive can depend on how narrow or broad you cast your net while defining the industry. For instance, the Mint editorial explains in detail how in a 1953 verdict on DuPont’s monopoly on the cellophane as a result of “result, business skill, and competitive activity”, despite having over 75% market share in the cellophane market, because the courts defined the “relevant” market as flexible packaging material, and not cellophane, the product. However, in most cases against platform businesses like Uber, the competition commissions and other regulators have defined the market as app-based taxi services, and therefore looked at the market being usurped by monopolies (Didi-Uber combine in China) or a duopoly comprising of Uber and a local operator (like Grab in SE Asia, OLA in India, Lyft in the USA).

Is Uber a competitor or substitute to Taxi?

In a detailed response to Prof. Aswath Damodaran’s 2014 article on Uber’s valuation (read it here), Bill Gurley (a series A investor and board member of Uber) defined three things (read Bill Gurley’s blog post here).

  1. He argues that Uber has since transformed the industry so much that one’s market size estimates based on current taxi market sizes is flawed. In other words, Uber was providing customers with far more value and a very different set of value propositions than a traditional taxi service – quick discovery, easy payment, predictability of service, quality (dual rating of riders and drivers), and trust/ safety. He talked about how Uber’s customers are using it to transport young adults/ children or older parents in the “comfort and safety” of an Uber, rather than a taxi.
  2. He argued that given the economies of scale that arose due to the positive cross-side network effects, more and more drivers and riders adopted Uber, and Uber expanded to more and more geographies, and the prices fell. And the price elasticity contributed to more demand and therefore more network effects. The economics of Uber (and therefore other ride-hailing app-based services) are very different from the city Taxi services.
  3. Uber is not a taxi alternative – it is a car-ownership (or a car-rental) alternative. When the liquidity (availability + density) of Uber vehicles is so high in every geography you want to travel to, you would rather not rent/ buy a car, but use Uber. The convenience and reduced cost of Uber as an alternative to ownership is something that he substantiates with data and analysis.

In other words, Uber was indeed a disruptor, and therefore was entitled to be treated as a separate industry. It is not a competitor to the for-hire taxi, it is an alternative; much the same way Kodak was bankrupted by digital photography (and not by competitors like Fuji).

Creative destruction and Schumpeterian waves of technology innovation

The Mint editorial called for Honorable Judges to not set taxi fares, simply because these disruptors would transform the industry through their technology innovation, and any restraining regulation would hinder these Schumpeterian waves. It is therefore an indirect call for letting these disruptors alone, let the waves of Schumpeterian technology innovation hit the markets, before we arrive at a stability of sorts. Regulation can wait.

Can regulation wait, and allow for a disruptor, in the excuse that the market is a “winner-takes-all” market monopolize the market? The popular arguments against monopolies is that of consumer protection, and that when monopolies rule, consumers suffer – prices rise, service levels fall, and there may be no alternatives. This is exactly the case for another wave of creative destruction.

My primary thesis is that when such disruptions happen on the basis of network effects, leading to economies and scale, and the disruption is based on parameters like improved customer service, lower prices, and transparent/ fair transactions (trust/ safety and the like), monopolies are not necessarily bad. When such monopolies emerge and the customer experiences deteriorate, as dictated by traditional industrial economics theory, the market will be ripe for another wave of Schumpeterian technology innovation. The waves of market entry in the Indian airlines market is testimony to these (1990s – privatization and shake-up leaving two state-owned and two private competitors; 2000s – entry of low-cost carriers leading to the demise/ consolidation of all stuck-in-the middle competitors; 2010s – entry and strengthening of regional airlines, is it?) waves of creative destruction.

Yes, there is space for other competitors, but not so much for Uber replicas. The market is indeed a winner-takes-all market (as I have argued in the past), and therefore there is just enough room for small, losing replicators. Look around the markets for Uber competitors, you do not find any market fragmented. While differentiation and creating niches is the prescription for firms competing with Uber, I request the regulators to begin treating such platform businesses as an independent market and let the inefficient product-markets fail, if required. No one cried when the offline ticket counters of Indian Railways are declining sales, thanks to the volumes garnered by IRCTC (some claim that this is the world’s largest ecommerce platform, is that true?). No one complains about bookmyshow.com garnering huge market shares in the app-based movie seat booking market, claiming that the livelihoods of the ticket clerks are under threat. Why cry about Uber, or for that matter, OLA, Grab, or Lyft?

There is already sufficient discrimination against these disruptors. In a recent visit to San Francisco, I made an extra effort (okay, walked down a flight of escalators) to click a picture at the SFO airport that read, “app-based taxis to pick-up from departures level”. Honorable Judges, please leave them alone, enjoy your ride/ movies/ every other service, contribute to the economies of scale, and let the market be disrupted.

Cheers.

 

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Author: Srinivasan R

Professor of Corporate Strategy at the Indian Institute of Management Bangalore. All views are personal. The views and opinions expressed here are of the author, and not those of the Indian Institute of Management Bangalore; and are not intended to endorse, harm, malign, or defame any individual, group, or organisation.

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