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Media / Internet

Regulatory challenges faced by technology companies

As tech firms play larger roles in more peoples’ lives, they attract the attention of regulators. Around the world, enquiries and court cases are underway, scrutinising everything from data protection to anti-competitive behaviour, and even – most notably – the role of tech firms in election interference.

In my last post, I disaggregated the ‘tech’ industry into four clusters of business, based on a loose framework. A quick recap: business models can generally be classified as platforms and aggregators, though most tech firms employ elements of both to generate revenues. I categorise revenues into four streams: advertising, one-off service fees, subscriptions, and sales of hardware and software. The intersection of these categories gives four clusters of business: aggregators selling advertising; aggregators and platforms selling services; platforms selling hardware and software, and finally, Amazon – a special case.

My last post described how these clusters help explain how different types of tech firms make decisions. In this post, I explore the regulatory challenges unique to each cluster, and the implications for consumers, both good and bad.

1. Aggregators selling advertising

Aggregators selling advertising rely on collecting and monetising vast amounts of user data through advertising targeting. Businesses like Facebook and Alphabet have a vested interest in finding out as much as they possibly can about their users. Consumers, and regulators, are concerned about the disincentive this creates towards keeping users’ behaviour, and their data, private.

(A common misconception is that Facebook and other aggregators sell data – though there are some third-party firms which collect and sell data, firms like Alphabet and Facebook hoard data to use as a strategic asset for hyper-specific ad-targeting. For the most part, APIs that allowed third-parties to collect data from Facebook only allowed users to share information such as their likes and hometown, rather than granular browsing data about their online habits.)

Of major ad-selling aggregators, Facebook is under the most high-profile regulatory scrutiny, following revelations that Russia used Facebook’s advertising service to disseminate polarising political content to U.S. voters ahead of the 2016 election. Alphabet also faces regulatory scrutiny, mostly in the European Union, due to anti-competitive behaviour on the Google Shopping service, and to a lesser extent, their implementation of ‘right to be forgotten’ laws.

The GDPR is a recent piece of European Union regulation with the largest direct effects on consumers. Websites operating within the E.U. must disclose what data they are collecting on visitors, and internet users must opt-in to most uses of their data, such as the use of cookies for ad tracking. In the short-term, it means a lot more clicks to grant permissions (or not) to websites, but ultimately ensures users have more control over their data and online privacy.

2. Aggregators and platforms selling services

Fee-for-service business models are relatively easy to replicate, which means it’s easy for fast-followers to enter and compete. The competitive dynamics – and the need for this cluster of businesses to limit churn, as discussed in the previous post – means consumers are treated well, lest they leave to a competitor. (Consider the choices of streaming service available to consumers: Apple Music, Spotify, Tidal, Google Play Music, Amazon Music.) Regulators largely don’t involve themselves with the demand side of aggregation or platform services.

However: platforms selling services sometimes reshape the supply-side of an industry in ways not anticipated by regulation. Airbnb and Uber, for example, claim to be new types of services that should not be subject to existing regulations or licencing for accommodation or driving. Such firms are able to exploit the cost advantages that come with less compliance, passing these on to consumers in the form of cheaper services. Regulators often seek to enforce the spirit of existing regulation and labour laws – to protect, for example, driver welfare – through specific taxes or by banning non-compliant services entirely. These tussles play out differently by country, state and city.

In general, consumers are served well by the intense competition found in most service marketplaces. In locales with more muscular regulation towards service platforms, the result is generally higher prices – but arguably a fairer result for the supply-side of the industry, such as drivers.

3. Platforms selling hardware and software

For platforms selling hardware and software, regulators threaten not to improve users’ privacy, but to undermine it.

Unlike aggregators who sell advertising, hardware and software companies do not primarily make money through user data. Their incentive is not to collect as much data as possible: rather, it’s to convince users to buy their products. Assuring buyers their data is safe can be a source of competitive advantage. For example, Apple highlights its data protection features – such as the inherent encryption of iMessage, and limiting websites’ ability to track Safari users. (At a recent developer conference, Apple specifically contrasted itself as more privacy-conscious than Facebook)

In fact, hardware and software platforms face the regulatory threat of their privacy controls being watered down. The U.S. government has long advocated for ‘back-doors’ to bypass encryption, claiming that Apple products’ privacy settings impede criminal investigations. Apple, to date, has not relented – seeking to uphold user privacy.

(Successful platforms selling hardware and software also face the threat of anti-trust regulation: Microsoft was nearly broken up in 2000 for veering too close to monopoly status. No hardware or software company is as close to a vertically integrated monopoly today, so break-ups seem less likely.)

4. Amazon – a special case

Retail is a highly competitive market, and Amazon do not appear close to monopoly status in any vertical – physical retail and online retail are incredibly fragmented. Regulators have generally left Amazon alone, with the slight exception of Trump’s promise to make Amazon pay more for shipping through the U.S. Postal Service, which is not quite regulation per se as much as a change to cost of goods.

It’s good news for consumers to date, as they benefit from Amazon’s products and services and the competitive pressures they place on a range of industries. However, as Amazon’s reach grows, it’s selling more and more white-label products: if you ask Alexa for “soap”, it will likely deliver Amazon soap rather than a competitors soap, which – if Amazon controls enough of the market for soap – is potentially anti-competitive. Expect regulators to keep a watch on this behaviour.

Sam Smith worked in a top-tier management consulting firm for two years before taking time out for study. They write under a pseudonym to bring you honest reflections and insider information.

Image: Pixabay

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