Of Chinese Walls and Tech’s Agency Problem
When platforms exploit platform risk
I was one of the first to discuss antitrust enforcement and monopoly powers (or lack thereof) with regard to today’s tech giants. I really hesitate to go down this rabbit hole again, but since these issues have reached public consciousness, I can’t help myself. These problems and solutions deserve a dedicated article, so here goes…
Tech’s agency problem
I’ve been referring to this as the “principal-agent problem” or the “agency problem”: If you’re an neutral agent, like a 3rd party platform, then you should have to file for a conditional regulatory exemption if you want to act as a principal, since such an undertaking pits your proprietary products and services against those of your suppliers. (See: The Amazon Case Study and Google AMP.)
For example, AmazonBasics is patient zero: No constituent benefits from Amazon’s sharp-elbowed promotion of their own, objectively inferior, poorly user-rated, relatively expensive batteries; in fact, all constituents are worse-off for it, except for Amazon itself. Similarly, nobody benefited from Apple Maps gatecrashing the mapping space, except for Apple itself. To be sure, it’s fine to launch a product-line that wins marketshare by undercutting the competition’s pricepoint; but it’s problematic to leverage a conflict of interest.
Unlike the private label brands at your supermarket — like Whole Foods’ 365 Organic and Costco’s Kirkland — Amazon Alexa and Apple’s iOS have secured marketshare for their proprietary products by leveraging the power of defaults: AmazonBasics and Apple Maps are not matters of channel conflict, disintermediation, or physical shelf-space; they’ve literally been presented as your default (and sometimes your only) options on their respective digital shelves.
Furthermore, even when Amazon feathers in its own private label brands atop (and among) a list of 3rd parties’ ecommerce products, digital tactics don’t compare to physical retail’s analog:
• 70% of Amazon customers never click past the first page of search results.
• 35% of Amazon shoppers click on the first product featured on a search page.
• The first three items displayed in search results account for 64% of clicks.
• 81% of clicks are on brands on the first page of search results.
Digital shelf space is different than its analog predecessor.
The Chinese Wall solution
In many industries, strict delineations exist to separate principals and agents who operate within the same organization. For example, in finance, Chinese Walls have remained en force throughout the ebbs-and-flows of regulatory legislation like Glass-Steagall and Dodd-Frank.
If Amazon wants to launch a line of proprietary products, like AmazonBasics, then those principal offerings should have to operate on the other side of a Chinese Wall from the agent platform. Amazon’s private label products should be independent of the core ecommerce platform; treated the same as 3rd party products by the algorithm; and subject to the same data/intelligence/information access as 3rd parties. This includes the strategic insights AmazonBasics gathers from AWS, as discussed by Lina Khan from Yale Law:
“…initially, AmazonBasics focused on generic goods like batteries and blank DVDs. “Then, for several years, the house brand ‘slept quietly as it retained data about other sellers’ successes.’” As it now rolls out more AmazonBasics products, it is clear that the company has used “insights gleaned from its vast Web store to build a private-label juggernaut that now includes more than 3,000 products.” One study found that in the case of women’s clothing, Amazon “began selling 25 percent of the top items first sold through marketplace vendors.”
— Highlights provided by Annotote
Vertical foreclosure
The most common push-back I get regarding the Chinese Wall solution is “vertical foreclosure”. In other words:
‘I love YouTube Red’s original shows, so why would I want regulation that would prohibit YouTube’s production of the content I love!?’
Yet, nothing about my proposal prohibits YouTube (or Netflix or Amazon Prime Video) from expanding vertically into original content production. Rather, I’d suggest that:
“[YouTube Red] should have to operate on the other side of a Chinese Wall — independent of the core [YouTube/Google] platform; treated the same as 3rd party [content] by the algorithm; and subject to the same data/intelligence/information access as 3rd parties.”
That likely means it’d have to be a separate app and/or the content would have to organically earn promotion via the same algorithm every other content creator is subjected to in the core app — thereby eliminating the principal-agent conflict of interest. That would restore the fair competition required of platforms were they to engender sustainable economic value creation.
In that vein, Microsoft’s Bill Gates is rumored to have defined “platforms” as follows:
“A platform is when the economic value of everybody that uses it, exceeds the value of the company that creates it. Then it’s a platform.”
Therein, Gates was contrasting Windows and Facebook’s different approaches to 3rd party developers. That’s so important — and a good place to conclude — because the “economic value” piece is something that’s sorely missing from a lot of today’s platform ecosystems.
When it comes to regulating monopoly power and antitrust, horizontal foreclosure is a separate issue — like the Medusa that is Facebook/Instagram/Messenger/WhatsApp — as are other market inefficiencies. But, the Chinese Wall regulatory approach at least addresses the vertical foreclosure that’s preventing Web 2.0 technology from spreading-the-wealth the way its proponents continue to promise it will.
Speaking of sustainable platforms
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