Online Platforms and the DSM - Scott Marcus

0 j. scott marcus

FSR Comms & Media, Annual Conference, 27 May 2016

Online Platforms

and the Digital Single Market (DSM):

The announcements of 25 May 2016

J. Scott Marcus

Member, Scientific Committee, FSR Comms & Media Programme

The opinions expressed are solely my own.

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Online Platforms

and the Digital Single Market (DSM)

• The DSM and the Commission proposals of 25 May 2016

- Boosting e-commerce

- Audiovisual policy and online platforms

• What is an online platform?

• European strengths and weaknesses

• The Commission‘s proposed approach to online platforms

• Concluding observations

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The Commission‘s

Digital Single Market (DSM) strategy

• An omnibus strategy put forward in May 2015.

• Far more promising than the Telecommunications Single

Market (TSM) strategy of 2013.

• Numerous elements:

- Reform of copyright

- Elimination of unjustified geo-blocking

- VAT reform

- Reform of cross-border basic parcel delivery prices

- Assessment of online platform issues

- Review of the RFEC

- Review of the ePrivacy Directive in light of the GDPR

- Review of the AVMSD

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The announcements of 25 May

• Reform of EU audiovisual rules

• An approach to online platforms

• Measures to boost e-commerce

• Measures to drive down cross-border parcel delivery prices

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Questions to ponder

• How do online platforms differ from other online services?

• How do Over-the-Top (OTT) services differ from other online

services?

• How do Over-the-Top (OTT) services differ from Electronic

Communication Services (ECS)?

• How should regulatory obligations differ between non-ECS

OTT services versus other online services?

• How should regulatory obligations differ between online

platforms versus other online services?

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More questions to ponder

• Are there inappropriate asymmetries today between OTT

services and other ECS services?

• If so, could asymmetries be reduced by:

- Selective deregulation?

- A shift away from sector-specific regulation to horizontal

regulation?

- Would horizontal regulation need revision?

(For example, current sector-specific end-users rules

protect not only consumers, but also other end-users

such as SMEs.)

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DEFINITIONS / TAXONOMIES

OF ONLINE SERVICES

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What is an online platform per the Commission?

• Online platforms typically:

- have the ability to create and shape new markets, to

challenge traditional ones, and to organise new forms of

participation or conducting business based on collecting,

processing, and editing large amounts of data;

- operate in multisided markets but with varying degrees of

control over direct interactions among groups of users;

- benefit from ‘network effects’, where the value of the service

increases with the number of users;

- rely on information and communications technologies to

reach their users, instantly and effortlessly; and

- play a key role in digital value creation, notably by capturing

significant value, facilitating new business ventures, and

creating new strategic dependencies. Source: European Commission (2016), Online Platforms and the Digital Single Market:

Opportunities and Challenges for Europe

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A taxonomy of online services

• There are many different kinds of online services.

Source:Baldry, Steingröver, and Hessler (2013), “The rise of OTT players –

what is the appropriate regulatory response?” (see also TRAI India)

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There are many different kinds of online services

Source: http://ottsource.com/ott-blog/

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One set of possible definitions

• Managed services: the

network operator controls the

QoE delivered.

• Online (unmanaged) services:

the network operator has little

influence over the QoE

delivered.

• OTT services: online services

that compete to some degree

with traditional

telecommunications or

broadcasting services.

OTT

Services

Managed

Services

Online

(unmanaged)

Services

Source: Godlovitch, Marcus, Kotterink, Nooren et al (2015), Over-the-top (OTT) players ...

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Another set of definitions

• BEREC’s October 2015 document “Report on OTT services”,

BoR (15) 142, provides a “taxonomy of OTT services that

consists of

- (a) OTT-0 services, which are OTT services that qualify

as ECS,

- (b) OTT-1 services, which are OTT services that do not

qualify as ECS but do potentially compete with ECSs

and

- (c) OTT-2 services, which are the remaining category

consisting of OTT services that are not an ECS and do

not potentially compete with ECSs.”

• Under this set of defintions, all online services are OTT

services. This seems unhelpful.

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Substitutes

• Substitution is often imperfect.

• In principle, the degree to which one service can function as

an economic substitute for another can be measured using

econometric techniques. If a service is a substitute in

another, then an increase in price of one service will tend to

increase use of the other.

• In practice, data quality may pose challenges, and it is often

difficult to establish a clear causal relationship.

“In theory, there is no difference between theory and practice.

In practice, there is.”

- Niels Bohr? Yogi Berra?

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THE COMMISSION’S

APPROACH

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The Commission’s approach

• The Commission did not propose a new general law on

online platforms.

• The aim is to make sure that platforms can be created, scale

up and grow in the European Union.

• To reach this goal, we need a functioning Digital Single

Market where online platforms (both startups and

established market operators) are not hampered by heavy

regulation.

Source: European Commission (2016), Online Platforms and the Digital Single Market:


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The Commission’s overall principles

• Differing national or even local rules for online platforms

create uncertainty for economic operators, limit the

availability of digital services, and generate confusion for

users and businesses. Harmonised rules such as the GDPR

and the NIS Directive are important to facilitate growth.

• Online platforms are already subject to existing EU rules in

areas such as competition, consumer protection, protection

of personal data, and single market freedoms.

• Future regulatory measures proposed at EU level must

address only clearly identified problems relating to a specific

type or activity of online platforms.

• Principles-based self-regulatory/co-regulatory measures can

play a role. Source: European Commission (2016), Online Platforms and the Digital Single Market:


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Competitive neutrality (the level playing field)

• There are few who would disagree with the general proposition that

similar services that are similarly situated, and that compete with

one another, should be subject to obligations that are similar (to the

extent that doing so is practical).

• This seemingly straightforward principle is difficult to apply in

practice.

- Are the new services really effective substitutes, are they

imperfect substitutes, are they economic complements, or are

they something else?

- Is the original rationale for the original regulatory obligation

really relevant to the online service that competes with it?

- How practical and proportionate is it to impose the traditional

obligation on a new service – does it impose unreasonably

high costs?

Source: J. Scott Marcus (2016), Economic impact of

Over-the-Top (OTT) services

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The level playing field

• Comparable digital services should as a rule be subject to

the same or similar rules, duly considering opportunities for

reducing the scope and extent of existing regulation.

• As part of the ongoing review of the RFEC, the Commission

will also consider applying a more limited set of

communications-specific rules to all relevant and comparable

services including when provided by OTT players.

• Analogously, the Commission will consider simplification and

adjustment of its scope and potential application of some of

its rules when reviewing the ePrivacy Directive in 2016.



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Ensuring that online platforms act responsibly

• The Commission will maintain the existing intermediary

liability regime.

• As part of the forthcoming copyright reform, the Commission

will aim to achieve a fairer allocation of value generated by

the online distribution of copyright-protected content by

online platforms.

• Fighting illegal or harmful content online is a priority.

• The Commission will further encourage coordinated EU-wide

self-regulatory efforts by online platforms.



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Consumer protection

• The Commission seeks to revise a range of Regulations and

Directives so as to facilitate more efficient enforcement of EU

consumer law in cross-border situations.

• In parallel, the Commission seeks to strengthen mutual

recognition of eID schemes.

• They would like industry to deal with deceptive practices such

as fake or misleading online reviews by means of self-

regulatory measures.



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Other areas of focus

• There are ongoing concerns as regards B2B services, but

actions for now are limited to a targeted fact-finding exercise.

• Respondents to the consultation saw the need for reduced

switching costs among online platforms.

- They argued for the development of common standards

for data transfers, and argued in favour of general

portability or transferability of raw personal and non-

personal data.

- Observation: The best known instance where this was

attempted (for AOL Messenger as a result of the AOL /

Time Warner merger) is not particularly encouraging.

Source for portions: European Commission (2016), Online Platforms and the Digital Single Market:


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The new strategy is part of a complex mesh

with many moving parts

• The Capital Markets Initiative (CMI) includes measures that

could promote start-ups and especially scale-ups.

- Improved access to venture capital.

- Less onerous, more uniform bankruptcy provisions.

• Startup Europe and the Entrepreneurship 2020 Action Plan

• There are other linkages to promotion of European industry,

and much more ...

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EUROPEAN STRENGTHS AND

WEAKNESSES

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Online services in Europe

• It is widely observed that the great majority of large online

service providers are US-based.

• Europe is not an inherently weak player, but we are failing to

play the game as well as we should.

• There are signs of recovery, but results are mixed overall.

- In terms of start-ups, including online services start-ups,

Europe has been doing much better in recent years,

nearly closing the gap with the United States.

- In terms of scale-ups – successful start-ups seeking to

grow their business to the next level – we are not doing

nearly so well.

• Long-standing and well known problems get in the way,

including lack of access to venture capital.

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When it comes to online services, Europe faces

challenges but is not inherently weak.

Helpful Harmful Inputs

Strengths

Size of the EU economy.

A large and highly educated,

adaptable workforce.

A relatively strong and

technologically innovative

manufacturing sector.

Increasing speed and capability of

devices and services, enhanced

price performance (Moore’s Law).

Economic and cultural diversity of

the EU.

Weaknesses

Lack of an entrepreneurial culture.

A society that places a high social and

economic price on failure.

Inertia, resistance to process change.

Fragmentation of Europe into Member

States with different linguistic,

administrative, legal, regulatory, and

cultural processes and traditions.

Continuing challenges in access to venture

capital.

Lack of leadership at EU level.

Complex and inconsistent taxation.

Gaps in fixed and mobile deployment and

adoption of ultra-fast broadband.

Outp

uts

Opportunities

Gains in GDP and overall gains in

(skilled) employment.

Economies of scale and scope.

Lower unit costs.

Lower transaction costs.

Overall acceleration of business.

Enhanced innovation.

Threats

Risks of losing further ground to global

competitors.

Negative impact on revenues, profit, and

employment for impacted sectors and

firms.

Privacy and security risks and breaches.

Risks of lock-in.

Risk of access and service monopolisation.

Source: Godlovitch, Marcus, Kotterink, Nooren et al (2015), Over-the-top (OTT) players ...

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CONCLUDING OBSERVATIONS

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Concluding observations

• Reduction of regulatory asymmetries is appropriate.

• In practice, however, definitional issues will be challenging,

as will be any selecctive shift to horizontal regulation.

• In the current climate, with the bulk of online platform

revenue going to the US and Asia, there is a tendency

toward protectionist measures ... which, however, might well

backfire, to the detriment of European online services.

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References

• European Commission (2016), Online Platforms and the Digital Single

Market:Opportunities and Challenges for Europe.

• Ilsa Godlovitch, Bas Kotterink, J. Scott Marcus et al. (2016), “Over-the-Top (OTT)

players: Market dynamics and policy challenges”, study for the IMCO Committee of the

European Parliament, at http://www.europarl.europa.eu/RegData/etudes/STUD/2015/569979/IPOL_STU(2015)569979_EN.pdf

• J. Scott Marcus (2016), Economic impact of Over-the-Top (OTT) services, forthcoming.

• Rochet, Jean-Charles/ Tirole, Jean (2004): Two Sided Markets : An Overview, March

2004, available at: http://faculty.haas.berkeley.edu/hermalin/rochet_tirole.pdf

• J. Scott Marcus and Georgios Petropoulos (2016), e-Commerce in Europe: Parcel

Delivery Prices in a Digital Single Market.

http://www.europarl.europa.eu/RegData/etudes/STUD/2015/569979/IPOL_STU(2015)569979_EN.pdf

http://faculty.haas.berkeley.edu/hermalin/rochet_tirole.pdf

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