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Posts Tagged ‘platforms

“Create more value than you capture”*…

As Donald Trump’s presidency careened to its ignominious end, with a mob of his supporters storming of the US Capitol, Facebook and Twitter banned the US president for inciting the violence. With that act, the scope of the political power wielded by Big Tech became impossible to ignore.

Whether these platforms have too much political power is a debate that is just beginning. Their outsize economic power, though, is unquestionable. The combined market capitalization of the five largest US tech platforms – Alphabet (Google), Amazon, Apple, Facebook, and Microsoft – rose by $2.7 trillion in 2020. Following the addition of Tesla to the S&P 500, the Big Six tech firms now represent nearly one-quarter of the index’s valuation. And with the spread of COVID-19, the leading digital platforms have become de facto essential service providers, enabling a mass transition to remote and isolated living.

And yet the political pressure on Big Tech has continued to rise. There is a growing consensus that platforms have been abusing their power, driving profits by exploiting consumer privacy, crushing the competition, and buying up potential rivals.

The economics of platforms is different from the economics of traditional offline and one-sided markets. Policymakers therefore need to reconsider some of their most basic assumptions, asking themselves whether they are even focusing on the right things.

A key challenge is to determine how the value of data diverges from the value created by providing a data-generating service. Platforms have the power to shape how decisions are made, which in turn can alter the value of the data being amassed. The implication, as Google co-founders Larry Page and Sergey Brin foresaw in a 1998 paper, is that advertisers or any other third-party interest can embed mixed motives into the design of a digital service. In the case of internet search, the advertising imperative can distract from efforts to improve the core service, because the focus is on the value generated for advertisers rather than for users.

As this example shows, it is necessary to ask who benefits the most from the design of a given service. If a platform’s core mission is to maximize profits from advertising, that fact will shape how it pursues innovation, engages with the public, and designs its products and services.

Moreover, it is important to understand that even if antitrust authorities were empowered to break up companies like Google and Facebook, that would not eliminate the data extraction and monetization that lie at the heart of their business models. Creating competition among a bunch of mini-Facebooks would not weed out such practices, and may even entrench them further as companies race to the bottom to extract the most value for their paying customers…

Digital markets do not have to be extractive and exploitative. They could be quite different, but only if we ourselves start to think differently. We need to recognize, as Adam Smith did, that there is a difference between profits and rents – between the wealth generated by creating value and wealth that is amassed through extraction. The first is a reward for taking risks that improve the productive capacity of an economy; the second comes from seizing an undue share of the reward without providing comparable improvements to the economy’s productive capacity.

For the past half-century, corporate governance has rested on the notion of shareholder value. The result is an economy in which it is increasingly important to differentiate firms that are actually driving innovation from those that are not. There is no shortage of firms that are engaged merely in financial engineering, share buy-backs, and rent-seeking, extracting gains from actual risk takers while under-investing in the goods and services that generate value.

The digital economy has accelerated this conflation of wealth creation and rent extraction, making it all the more difficult to differentiate between the two. The issue is not just that financial intermediaries are shaping how value is created and distributed across firms, but that these extractive mechanisms are embedded within user interfaces; they are baked into digital markets by design…

The proliferation of such practices shows why we need to focus more on the “how” of wealth creation, and less on the “bottom line.” An economy that produces wealth from privacy-respecting innovations would not function anything like one that encourages the systematic exploitation of private data.

But building a new economic foundation will require a shift from the shareholder model to a stakeholder model that embodies a deeper appreciation of public value creation. Wealth and other desirable market outcomes are collectively co-created among public, private, and civic domains, and should be understood as such. Policy analysis and corporate decision-making can no longer be guided solely by concerns about maximizing efficiency. We now also must consider whether wealth generation is actually improving society and strengthening the ability to respond to social challenges.

After all, the fact that platforms are creating wealth does not mean they are creating public value. A firm with access to massive amounts of data and network effects could, in theory, use its position to improve social well-being. But it is unlikely to do so if it is operating under a framework that prizes the generation of advertising revenue over everything else, including the performance of products and services…

Today’s digital economy has grown up around a business model of data and wealth extraction, confounding traditional antitrust paradigms and undermining the public and social value that otherwise could be derived from technological innovation. An acute diagnosis of a fundamental structural challenge, and thoughts on steps to address it– Mariana Mazzucato (@MazzucatoM), Tim O’Reilly (@timoreilly), and colleagues: “Reimagining the Platform Economy.” Do click through to read piece read the entire piece.

* Tim O’Reilly

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As we dig deep, we might recall that it was on this date in 2005 that YouTube was founded and registered (though it didn’t launch until November of that year). The creation of three PayPal vets (Chad HurleySteve Chen, and Jawed Karim), it was bought by Google one year after launch (in November 2006) for $1.65 billion. Operating as one of Google’s subsidiaries, it is now (per Alexa Internet Rankings) the second most trafficked web site, after its parent’s search page.

YouTube logos over time

source

Written by LW

February 14, 2021 at 1:01 am

“In a free market the people are free, the ideas are locked up”*…

 

gift

 

Back when I first studied gift exchange, I dismissed its economic importance—after all, it reflects only a tiny portion of all our transactions. Perhaps it might interest an anthropologist, but only as a kind of curiosity item, a refreshing but impractical alternative to the real substance of economic life. But as I see it now, the gift economy is much larger than I realized—in fact, it’s almost as large as the transaction-based economy. For a start, I’ve seen its predominance in my own life. My wife and I don’t charge my children for their meals or the hours of service we provide them. My friends dealing with elder care or community service or church activities operate off-the-grid, so to speak—at least from a conventional economic perspective. These are gift exchanges, pure and simple, and they are everywhere you look, even in a modern capitalist society.

But I’m concerned here with a different class of activities, ones that straddle these two spheres—and are hard to classify for that very reason. Artistic or creative pursuits, endeavors that are typically pursued for the intrinsic joy of sharing one’s gifts, are also frequently commoditized and placed on the market. Are they part of the gift economy or the transaction economy?…

The estimable Ted Gioia explores: “Gratuity: Who Gets Paid When Art Is Free.”

[image above: source]

* Lewis Hyde, The Gift: Creativity and the Artist in the Modern World

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As we share and share alike, we might recall that it was on this date in 1927 that Mae West was sentenced to 10 days in a workhouse on Roosevelt Island (known then as “Welfare Island”) and fined $500 for obscenity for her play Sex… despite the fact that the play had run over a year before the police raided, and had been seen by 325,000 people– including members of the police department and their wives, judges of the criminal courts, and seven members of the district attorney’s staff.

In the event, she served eight days of her sentence, receiving two days off of time for “good behavior”– and the resulting publicity did great things for Ms. West’s notoriety nationwide.

source

 

Written by LW

April 19, 2020 at 1:01 am

“Of course our lives are regulated. When you come to a stop sign, you stop; if you want to go fishing, you get a license; if you want to shoot ducks, you can shoot only three ducks. The alternative is dead bodies at the intersection, no fish, and no ducks. OK?”*…

 

Regulation

 

After a characteristically-clear explanation of the ways in which the “monopoly practice” concerns around Google, Amazon, and the other on-line giants are different from those the U.S. has traditionally tried to manage– they limit/manage choice– the ever-illuminating Tim O’Reilly argues for a fresh approach to anti-trust:

So how are we therefore best to decide if these Big Tech platforms need to be regulated?

In one famous exchange, Bill Gates, the founder and former CEO of Microsoft, told Chamath Palihapitiya, the one-time head of the Facebook platform:

“This isn’t a platform. 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.”

Given this understanding of the role of a platform, regulators should be looking to measure whether companies like Amazon or Google are continuing to provide opportunity for their ecosystem of suppliers, or if they’re increasing their own returns at the expense of that ecosystem.

Rather than just asking whether consumers benefit in the short term from the companies’ actions, regulators should be looking at the long-term health of the marketplace of suppliers—they are the real source of that consumer benefit, not the platforms alone. Have Amazon, Apple, or Google

earned

their profits, or are they coming from monopolistic rents?

How might we know whether a company operating an algorithmically managed marketplace is extracting rents rather than simply taking a reasonable cut for the services it provides? The first sign may not be that it is raising prices for consumers, but that it is taking a larger percentage from its suppliers, or competing unfairly with them.

Before antitrust authorities look to remedies like breaking up these companies, a good first step would be to require disclosure of information about the growth and health of the supply side of their marketplaces. The statistics about the growth of its third-party marketplace that Bezos trumpeted in his shareholder letter tell only half the story. The questions to ask are who profits, by how much, and how that allocation of rewards is changing over time…

Data is the currency of these companies. It should also be the currency of those looking to regulate them. You cannot regulate what you don’t understand. The algorithms that these companies use may be defended as trade secrets, but their outcomes should be open to inspection.

An important read: “Antitrust regulators are using the wrong tools to break up Big Tech.”

* Molly Ivins

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As we bust trusts, we might recall that it was on this date in 1974 that the Supreme Court handed down its unanimous decision in United States v. Nixon, ordering him to deliver tape recordings and other subpoenaed materials to a federal district court.  Special prosecutor Leon Jaworski had subpoenaed the tapes as part of on-going impeachment proceedings; the White House had sued to quash; and the decision is widely viewed as a crucial precedent limiting the power of any U.S. president to claim executive privilege.

nixon_sony source

 

 

Written by LW

July 24, 2019 at 1:01 am

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