How to regulate Internet giants

In the aftermath of the US presidential elections, People are becoming increasingly aware of the real power of online platforms. Lots of articles are written about two disturbing trends in our democracies: the uncontrolled spread of fake news on social platforms and the danger of “filter bubbles” generated by the algorithms which personalize the content they feed us.

Nowadays social platforms such as Facebook or Twitter have become crucial players of the media environment. Indeed, the recent events made it clear that a large part of the citizens get their news on these platforms. And with great power comes great responsibility. How should platforms answer criticisms that they failed to address the false news problem or that their algorithms distort the way we see the world by hiding opposing viewpoints? Trust being at the core of the digital economy, will they succeed to adapt their models to the societal demand?

Or, with not only our economy but also our democracy being at stake, is there a need to regulate Internet giants?

All these questions are currently under close scrutiny: from the platforms themselves (1) but also from the civil society, in the US (2), and in Europe (3). I recently published an article in a French specialized Journal on how to regulate Internet giants and I would like to share it on a broader scale. I hope this paper, from a regulator perspective, will contribute to this very important societal and political debate.
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How to regulate Internet giants?

While its philosophy of complete decentralisation enabled it to conquer the world, the Web is now coming to centre around a handful of heavyweight intermediaries. Imposing themselves through mightily efficient disintermediation — or rather re-intermediation — models, these new platforms are the masters of the digital economy. The stakes are such that some form of regulation needs to be constructed. But in a global market of extremely fast-paced innovation, as the digital economy is, the cost of ill-conceived regulation would be far too high. In this article, we set out to explore possible avenues for designing a new kind of agile and crowd-constructed regulation, which will be vital to instilling trust in a sector that forms the bedrock of tomorrow’s economy and society.
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A business model that’s “eating the world”

What is a platform?

The notion of platform encompasses a vast array of situations (search engines, app stores, sharing economy services, etc.). What sets this model apart from the so-called Internet 1.0 and e-commerce is that it opens the way for connections between users and applications and content developed by third parties.
A great many definitions of what constitutes a platform have been offered up of late. Here we will stick to the one suggested, at least at the time of this writing, by France’s Digital Republic bill. In this article, we will therefore qualify an online platform operator as “any natural or legal person that provides an online communication service on a professional basis, whether gainful or not, based on:

• The ranking or listing, by means of computer algorithms, of content, goods or services sold or put online by third parties;
• Or establishing a link between several parties with a view to selling goods, providing a service or exchanging or sharing content, goods or services”.

The digital economy’s new masters

Having imposed themselves through disintermediation — or rather re-intermediation — these new “barbarians” are now reshaping the established social order. In addition to “uberising” our industries, these players are by-passing traditional intermediaries by applying the Internet founding fathers’ (of which Paul Baran is one) philosophy of complete decentralisation. They promised the construction of a horizontal and decentralised world, and even a “third industrial revolution,” as popularised by Jeremy Rifkin. More than ever before, “software is eating the world” — to echo Netscape founder, Marc Andreessen.

Illustration from “On Distributed Communication Networks” (Paul Baran — 1964)

If the model has been so hugely successful, it is because it offers its users an incomparable level of service and, thanks to a close alliance with end-users — what Henri Verdier and Nicolas Colin call “the multitude”, it serves to maximise network effects (4) and to capitalise on the efficiencies drawn from the data accumulated.

But there is flipside to this coin: the consequences of this success have meant that, contrary to its founding philosophy, the Web today is helping to create new gatekeepers. And that is not the least of its paradoxes, as outlined by Yochai Benkler, author of “The Wealth of Networks”.

Once this new type of platform is well established, it often becomes a winner takes all situation: a single player grabs a substantial share of the market in question, finds synergies in adjacent markets thanks to its increasing returns, and reigns over entire swathes of our economies. This may seem like an only theoretical situation, but already today a drop in Google Search ranking, losing a listing on an app store or a bad review on TripAdvisor can be enough to significantly impact a company’s future.

Louis Pouzin, a French engineer who was instrumental in the Internet’s creation, speaks openly of the “colonisation by information” — a problem that can only be exacerbated under the influence of our economies’ digital transformation.

A key issue for the digital transformation

The stakes are such that some new kind of regulation needs to be designed. But even more than anywhere else, in the digital world, as Montesquieu recommended: “laws should only be touched with trembling hands”. In a market in transition, a market of constant innovation, as the digital economy is, ill-conceived regulation runs the risks of throttling innovation and, ultimately, of favouring incumbent players rather than keeping them in check. First, then, let us analyse the mechanisms that could countervail platforms’ power.

Existing safety valves

In the digital economy, even the most apparently well-entrenched positions remain precarious, and the players are locked in a fierce competition to seduce consumers. The Internet’s history is filled with these Goliaths who were thought to be invincible not so long ago, and whose influence has severely waned (AltaVista, MySpace, etc.).

This competition between a plurality of platforms is an important safety valve for preventing possible abusive behaviour. But analysing its effects is no simple matter: if this competition does its job in terms of the quality and price of the service provided to consumers, questions remain over the other facets of this model (B2B relationships, interface with collaborative economy workers…).

Applying ordinary law

Platforms are not exempt from many aspects of the law (competition law, data privacy laws, consumer law, commercial law and more specialised laws such as those that govern e-commerce and information systems’ security).

The global nature of the digital economy nevertheless raises questions over the territoriality of the law. This is why, as part of its Digital Single Market strategy for Europe, the European Commission is revising or fleshing out different laws for the digital era (data protection regulation, Network Security and Information (NIS) directive, e-commerce rules, Audiovisual Media Services directive (AVMSD), Telecoms Package to address companies such as Skype or WhatsApp…).

Securing the playing field

Delisting, changing the terms and conditions of sale, changing Application Programming Interfaces (APIs)…: these unilateral moves by platforms can be a matter of life or death for the companies they affect. It is nevertheless hard to measure their impact as these problems are hard to pin down, and the small and medium enterprises (SME) and start-ups that suffer their slings and arrows are more concentrated on the business than the regulatory side of things. But a clear trend is emerging: a growing concern amongst the many stakeholders (businesses and civil society).

Now that digital technology is making its way into a growing number of sectors of the economy, our businesses’ growing dependence on the actions of a few Internet giants is a real source of concern. The playing field for our future economy is at stake. As Jean Tirole reiterated in his book, Economics for the common good, the State’s main role with respect to the economy is to create the climate of trust required for trade to flourish. For public authorities, the task is therefore not to build regulatory Chinese walls but rather, first and foremost, to provide all of the players with a maximum sense of security and trust, and so fully unleash innovation.

The principle of an open Internet

The introduction in late 2015 of new dedicated Internet regulation, in Europe, marks a profound paradigm shift. Europe’s Open Internet regulation imposes a set of rules on Internet service providers (ISP) with a view to guaranteeing net neutrality, in other words an obligation for the pipes (networks) to relay content in an agnostic fashion.

These rules are above all preventive and, in the main, do not result from observed abusive behaviour from market players. In other words, these principles are above all an expression of a political will to consecrate the Internet as a common good, a free and open area of trade, exchange, connection and innovation.

This makes an important difference with the US, where similar rules have been introduced by the regulator, the FCC, not by law makers.

Net neutrality: the crux of the matter…

The regulation introduces the principle of an “open” Internet where, thanks to their Internet connection, every user (individual, business, website, application, etc.) has full access to all of the information and all of the content available online, and can himself freely contribute to the Internet. To guarantee the protection of this principle, a certain number of rules are imposed on operators, and national regulatory authorities (in France, this task falls to the Electronic Communications and Postal Regulatory Authority, Arcep) are charged with enforcing compliance with these rules.

The choice of regulation is a weighty political choice as it will shape economic players’ choices and the market’s structure. Telecom carriers’ possible desire to forge agreements with tech giants (Google, Apple, Facebook, etc.) to accelerate the transmission of their content will thus be severely thwarted. This, for instance, was the principle on which Indian regulator TRAI based its decision to forbid Facebook from launching its Free Basics service.

Platforms: a period of reflection underway in France and Europe

The story is only just beginning: digital gateways are not limited to pipes but also encompass applications and online platforms. And because of the massive influence that a handful of Internet giants have secured over our fellow citizens’ access to knowledge and culture, a great many stakeholders today are demanding that serious consideration be given to extending these new protection rules to digital platforms.

Whether or not to regulate certain platforms will ultimately be a societal choice, stemming from a policy decision. In France, there have already been several noteworthy legislative initiatives: the Macron Act and the Lemaire Act introduced respectively provisions specific to certain digital platforms (sharing economy platforms) and a fairness obligation for digital platforms into the country’s Consumer Code.

There is still no consensus at the European level, neither over the need for dedicated regulation, nor even the principles to apply. But the Commission is working on the issue (5), and it seems very likely that it will become a focal point for European MPs in the coming years.

Dedicated digital platform regulation: some points to consider

If a new set of rules for platforms were to emerge, it would of course not simply be a matter of copying and pasting existing infrastructure (telecoms, postal, energy, transportation, etc.) regulation schemes. New forms of regulation need to be invented to adapt to the accelerated pace of innovation and the global nature of the players.

A necessarily European construction

Any legal action taken on digital platforms must be part of an at least European-scale proposition, as the digital ecosystem and its players operate largely on a global scale. As underscored by France’s Conseil d’État (6), introducing national legal provisions is liable to create compatibility issues with the European legal framework.

National-scale legal action would also raise enforcement issues when it comes to global players headquartered abroad. Hence the risk is that these provisions would mainly affect local platforms (Le Bon Coin, Allociné, BlaBlaCar, etc.) which would thereby suffer an additional regulatory handicap when competing with American and Asian giants. This does not mean that national law would not apply to the latter, but they will always be able to engage in lengthy litigation to postpone the rules’ enforcement.

Moreover, national-scale action runs the risk of creating a disparate legal system at the European level, which would be a new source of fragmentation for the digital single market.

Creating a fast-track arbitration procedure

In addition to the principles that could be incorporated into positive law is the question of their enforcement. The current institutional framework generates certain consistency issues (7), and the Court or European Commission settlement process may not be fast enough. Given the rapid pace of innovation in the digital economy, and how highly technical the subject is, turnaround time is a crucial metric for any applicable regulation. In the case of disputes between platforms and start-ups or SMEs, the regulation must allow them to be settled in a few months, which is not yet the case today (8).

An ad hoc procedure, with set time limits (three to six months) and reserved for small businesses could thus be created for the digital economy. By way of comparison, Arcep must settle disputes between telecom carriers within four months, setting fair technical and pricing terms and conditions. This option would make it possible to provide an SME or a start-up with a very rapid response when confronted, for instance, with a listing problem with a tech giant.

Score platforms before trying to regulate them

If it seems premature to adopt national schemes that contain binding rules, the time is ripe to begin collecting and publishing information to inventory, analyse and compare the practices of online platforms. To this end, the proposal of the French national digital council to promote a system for scoring platforms (9) that could exert pressure on these players through benchmarked quantitative analyses, is a particularly interesting one.

Given the variety of platforms and the subject’s complexity, the aim must be a profusion of information and tests, and not total centralisation. For it to be efficient, this scoring system must therefore operate under a “Government as a platform” strategy, relying on an open network of contributors. The public authority could confine its role to that of an “information hub”, in other words a certifying third-party that ensures the fairness and accuracy of the published information. The public authority’s ability to obtain information directly from platforms may also be viewed as a safety net to prevent the platforms from artificially blocking access to the useful data being sought.

Such a system would also make it possible to collectively overcome the current lack of understanding of these issues, and to ascertain the difficulties in an objective fashion. It would thus serve as the cornerstone for the subsequent construction of coordinated action at the European level. Several members of the French and European Parliament have pushed for such an initiative — Bernard Lalande, Pierre Camani, Anne Sander — but still without success at this stage.

Unbundling data and algorithms?

As tech giants domination often comes from the “winner takes all” phenomena, a question raises: should certain key sets of data gathered by tech giants and/or algorithms running on their services be qualified as “common goods”, i.e. enablers for the digital economy that should be made accessible to third parties rather than exploited in “silos”? This is a classical question when it deals with physical infrastructures. In the telecom sector for instance, European regulators have been forcing since the 90’s incumbent operators to unbundle their telephony networks, allowing a quick take up of broadband services.

Nevertheless, an important difference with physical networks, relies on the fact that many internet companies are spontaneously opening data and algorithms through APIs (application programming interfaces), in order to even increase the traffic over their platform. This being considered, scoring the openness of tech giant APIs could be a first interesting step to evaluate the need for further regulation.

Europe has many assets to bring to the table in this new economy: a highly competitive telecom sector, internationally renowned innovation centres, talent that is courted the world over and, of course, magnificent entrepreneurial success stories that offer alternatives to the incumbent giants (Criteo, Spotify, King Digital, Sigfox…). Governments are positively committed, through pro-active strategies for investing in innovation and start-ups and by a change in mentality, to develop a taste for risk-taking and cooperation. Alongside this approach, a strategy for promoting (and sometimes, if necessary, for protecting) our values, will also be required if we want our model not only to survive, but also to continue to thrive well into the future and renew itself thanks to (and as part of) the digital revolution.

NOTES

(1) “Zuckerberg reveals plans to address misinformation on Facebook”, Kate Conger, Techcrunch, 19 November 2016.

(2) “Media in the Age of Algorithms — What’s the future?”, Tim O’Reilly, Medium, 11 November 2016 and “How social media creates angry, poorly informed partisans”, Timothy B. Lee, Vox, 26 October 2016.

(3) “Comment les algos nous rendent tous débiles”, Benoît le Corre, L’Obs avec Rue 89, 31 October 2016 and “Face à la trahison des plateformes aux Etats-Unis, faut-il revoir notre code électoral? ” Jean-Baptiste Soufron, BFM Business,14 November 2016.

(4) The network effect is an economic phenomenon whereby the collective value of a good or service increases as new users connect to it/buy it.

(5) In its communication of 6 May 2015, the European Commission announced the start of a review process on platforms. A public consultation on assessing the role of platforms in the digital economy was launched in September 2015 and the Commission adopted a Communication on Platforms outlining its conclusions in May 2016.

(6) “Étude annuelle 2014 — numérique et les droits fondamentaux” (2014 annual report — Digital and fundamental rights), especially pp. 272–274.

(7) In the case of Booking.com, for instance, French and Italian legislators contradicted a joint decision from competition authorities.

(8) The statement of objections the Commission sent to Google in April 2016 marked the end of a preliminary investigation that lasted five years.

(9) “Ambition Numérique — Pour une politique française et européenne de la transition Numérique” (Digital ambition — A French and European digital transition policy), June 2015.