Regulations, good or bad for big tech?
How Google, Facebook, Apple, Amazon and Microsoft navigate regulated markets.
Some markets, for example education, are too important for the well-being of a nation to be left to its own devices. For this reason, governments influence these markets into a desired political direction. This interference makes it less predictable and thus more difficult for platforms to form strategies. The direction of the market is enforced through regulation. Some regulations are used to incentivize innovation. For example, by assigning funding to be only spent on certain products. Other regulations are used to discourage undesired actions. Like to prevent abuse of vulnerable customers.
The ability for a platform to enter and grow in a socially regulated market is thus heavily influenced by how the legislators envision the future of the market. These governmental interferences make it more difficult to assess the market based on market forces and theory alone. Regulated markets will thus require extra strategic oversight compared to a market with less regulation. For my master thesis I have analyzed the strategies used by Google, Amazon, Facebook, Apple and Microsoft to enter and grow in a socially regulated market; the US education market. This article will analyze some of the takeaways on how these platforms deal with the influences of regulation on strategy.
Sidenote: For clarity, a distinction must be made between two types of regulations; economic regulations and social regulations. Economic regulations are put in place to sustain growth and counter the harmful effects of dominant firm behavior. These regulations are used in most industries. Social regulations are more focused on topics like healthcare, safety and the environment. These regulations are concerned with the overall wellbeing of the consumers, nation and the environment, this article is mostly concerned with social regualtions.
Thriving in regulated markets
To thrive in a socially regulated market a platform should take the differences with a non-socially regulated market into consideration. Success depends on the ability of a platform to align its strategy with political desires. However, political desires can change abruptly, making the strategy outdated. The relation with the competition is also influenced by regulations. The customers are dependent on funds from the government. Spending is thus guided by political desires. Meaning that if a platform does not conform to the funding regulations it will not be able to sell any products in the market. This makes it more difficult to differentiate from the competition and win customers.
Platforms that have tried to venture into regulated markets have dealt with these challenges in different ways and with varying amounts of success. A much-used strategy to circumvent the dependency on funding is to expand revenue sources into alternative areas. This can be done by offering extra services for free or with substantial discounts. To further diminish the effect of regulation on the uncertainties of the market, a much-used strategy is to diversify the portfolio. This gives them an edge by having many available options to adapt to the new regulation with.
Funding makes the market go round
Because the education sector is important for the future prosperity of a nation. It is important that it stays up to date. To incentivize the market into producing the desired products, legislators introduce restrictions on what funding can be spent on. The government is in effect the customer who through regulation guides the market into making what it wants.
Sometimes regulations are used to incentivize the market into making better fitting alternatives. Apple, for example, has always created very capable but expensive products. These products have often been the staple of the industry and were designed with education in mind. However, most education customers barely used most features of the computer. The introduction of the Macintosh made this most apparent. This computer became a popular tool for schools to introduce computerized education.
With the introduction of the internet came the need for internet infrastructure and more desktop computers in the classrooms. Consequently, new regulations would increase the funding for internet infrastructure and favouring cheaper education-specific desktop computers. The Macintosh became too expensive due to this new reform in funding. At this time, Microsoft introduced its operating system for third-party hardware manufacturers. This gave their products more customizable options. A school could buy cheaper general computers and some more specialized computers, all running the same operating system. Microsoft’s product was thus better suited for the next phase of computers in education, outcompeting Apple.
Dealing with funding
Not being able to comply with the new regulations can cost market share. It can thus be a wise strategy to lessen the influence that regulation can have on the position in the market. The most effective method of getting around the influence of funding is through utilizing alternative revenue sources. The customers are not spending their own money and are bound by regulations. A much-used strategy is to offer the products for free or at a lower cost while earning money in different areas, such as advertisements.
When Google entered the public regulated education market it offered a free mailing service to universities. This meant that the universities could adapt Googles mailing services independent of what the funding told them to. This adoption opened the door for other applications made by Google such as Google docs. When Google introduced its Chromebook (Googles proprietary tablet), users were already familiar with the products, consequently decreasing the switching costs. The regulations steer the market by limiting funding for certain developments. By limiting the dependency on these funds, the influence of these regulations can be decreased.
A shift in the power balance
Platform markets often see the rise of a dominant player. Switching costs and network effects make it more difficult for new entrants to challenge this position. The regulated US tech education market similarly often sees the rise of a dominant player. However, this position is often weakened after the introduction of a new regulation giving challengers a chance. New regulation more or less resets the power balance and leaves room for new players to enter.
New regulation can change the demands of a regulated market, which decreases the power of the dominant player. For example, Apple introduced the iPad to the education market with great success. The product introduced a new use for technology in education and Apple quickly dominated the market. However, much as with the Macintosh, the iPad was overqualified for what it was used for and consequently too expensive. A new regulation was introduced limiting the percentage of funding that could be spent on hardware. Now the iPad became too expensive and new players could introduce their alternatives.
Google took this chance and introduced an education-specific Chromebook. This new regulation shifted the needs of the education market to favour cheaper alternatives. Bringing Apple down from their dominating position. Hence, in a regulated market, market conditions can change quickly. The introduction of a new regulation can change the whole market dynamics. This means that innovations are quicker to be adopted while a market with less external interference would have a slower transitional phase.
Preparing for the unknown
These abrupt changes mean that being prepared for new developments is crucial. Microsoft, for example, depended on third parties for its hardware innovations. However, when new regulations expressed the desire for more personal devices for individual students. Microsoft was not able to innovate fast enough due to having no manufacturing capabilities This cost them their leading position. While Google could quickly adapt one of its many products. Therefore, flexibility is important when dealing with regulations. The most successful platforms have a large variating portfolio with which they can quickly adapt to new market situations.
Key take-aways for platforms looking to expand into a regulated market
Platforms expanding into a regulated market should take into consideration that traditional platform theory does not completely cover the challenges which could be faced.
- Platforms which wish to expand into a regulated market should thus look for opportunities around the introduction of the new regulation. These will give new players the chance to enter the market on a more level playing field.
- A proper balance should be found between pricing and product specifications. The customer is spending public money; thus, the product should just be doing what it has to do. To stay competitive, extra features can be subsidized through alternative incomes.
- Most important is to spread the portfolio over the market. New regulations can destroy the main product. Without an alternative product in the market, it could quickly limit the position in the market.
About Jasper Maljers
Jasper has just finished his master’s in digital business and Innovation at the Vrije Universiteit in Amsterdam. With a fresh and entrepreneurial mindset, he wants to tackle real-world issues with technological solutions. Through being a bridge between technology and business he wants to work towards a more sustainable and connected world. Works best in international environments dealing with new innovative solutions to problems people do not realize they have. Looking for project management or research position in a consultancy or scale-up. Would you know any opportunities for Jasper, contact him here.
