Mariana Mazzucato - The Value of Everything - Making and Taking in the Global Economy

Standing on Platform Capitalism

‘Platform capitalism’ is often referred to as the new way in which goods and services are produced, shared and delivered – more horizontally, with consumers interacting with each other, and less intermediation by old institutions (e.g. travel agents). The so-called sharing economy, based on this framework, works by reducing the frictions between the two sides of the market: connecting buyers to sellers, potential customers to advertisers, in more efficient ways. It is presented as a radical transformation in the way that goods and services are produced, shared and delivered. It adds value by taking what was previously peripheral to the service – in Uber’s case, ordering, selecting, tracking and paying for a cab – into its core. But when disabled users have complained to Uber about their drivers refusing to put wheelchairs in the boot of the car, Uber has sought to evade responsibility on the basis that it is not a taxi company, merely a platform. 67Likewise, there is increasing evidence that Airbnb is similarly reluctant to take responsibility for such matters as the safety of premises offered on its site or racial discrimination against renters by property owners.

Furthermore, Uber’s pursuit of economies of scale (based on the size of the network) and economies of scope (based on the breadth of different services, including UberEats) has led to higher profits on the backs of the key contributors to value creation for the company: the drivers. Indeed, while costs have been falling for the consumer, they have been rising for the drivers: in 2012 Uber Black (one of the company’s car services) cost riders in San Francisco $4.90 per mile or $1.25 per minute. When, in 2016, charges fell to $3.75 per mile or $0.65 per minute, consumers gained. But the result of this sharing economy is that Uber Black drivers are paid less, ‘standards’ rise (with pressure for drivers to offer ‘pool’ services to customers) and competition from Uber’s other services intensifies. 68While drivers are increasingly complaining, Uber’s market reach is higher than ever and growing every day: as of October 2016 it had 40 million monthly riders worldwide. 69In 2016 it had 160,000 drivers in the US, with millions more spread across 500 cities globally – all working as ‘independent contractors’, so that Uber does not have to provide them with the kind of healthcare and other benefits which they would receive as full-time employees.

Uber, like Google, Facebook and Amazon, seems to have no limit to its size. The network effects that pervade online markets add an important peculiarity: once a firm establishes leadership in a market its dominance increases and becomes self-perpetuating almost automatically. If everyone is on Facebook, no one wants to join a different social network. As most people search on Google, the gap between Google and its competitors grows wider because it can elaborate on more data. And as its market share rises, so does its capacity to attract users, which in turn increases its market dominance. 70

Contrary to the pious pronouncements of Internet pioneers, network effects are increasingly centralizing the Internet, thereby placing an enormous concentration of market power in the hands of a few firms. Google alone accounts for 70 per cent of online searches in the US, and 90 per cent in Europe. Facebook has more than 1.5 billion users, a quarter of the planet’s population and streets ahead of its competitors. Amazon now accounts for around half of the US books market, not to mention e-books. Six firms (Facebook, Google, Yahoo, AOL, Twitter and Amazon) account for around 53 per cent of the digital advertising market (with just Google and Facebook making up 39 per cent). 71Such dominance implies that online giants can impose their conditions on users and customer firms. Many book publishers, for example, are unhappy with the conditions Amazon insists upon and are asking for better ones. But they have no leverage at all, because – as Evgeny Morozov puts it – ‘there is no second Amazon they can turn to’. 72The powerful network effects in the two-sided market have entrenched these companies’ position. Companies like Google are de facto monopolies. 73But they are not recognized as such and have not attracted the kind of anti-trust legislation that large companies in more traditional industries – tobacco, autos, food – have done.

The dominant position of a platform provider in core markets can then be used to favour their products and services in satellite markets, further extending the company’s reach. The European Commission is investigating Google precisely because it is alleged systematically to tilt its search results in favour of its own products. By the same token, many users are not happy about Facebook appropriating, storing, analysing and selling to third parties so much of their personal data. But as long as all their friends are on Facebook, there is no equivalent competitor they can turn to. The standard defence of companies such as Facebook that ‘competition is just one click away’ is simply false in markets where network effects are so important.

A recent study by researchers at the University of Pennsylvania surveyed 1,500 American Internet users to understand why they agree to give up some privacy in return for access to Internet services and applications. The standard explanation is that consumers compare the cost of losing some privacy with the benefit of accessing these services for free, and accept the deal when benefits exceed costs. A competing explanation is that many users are simply unaware of the extent to which online companies invade their privacy. But, interestingly, the results of the Pennsylvania survey are inconsistent with both explanations. Instead, they suggest that consumers accept being tracked and surrendering their personal data, even if ideally they would prefer not to, not because they have happily embraced this quid pro quo, but out of resignation and frustration.

It is understandable that people feel they have no choice. In today’s society, it is hard to live and work without using a well-functioning search engine, a crowded social network and a well-supplied online shopping platform. But the price of accessing these services is to accept the conditions the dominant provider imposes on a ‘take it or leave it’ basis, given that there are no comparable alternatives.

CREATING AND EXTRACTING DIGITAL VALUE

The digital giants’ enormous market power raises critical issues about privacy protection, social control and political power. But what concerns us here is the impact of this market power on the relationship between value creation and value extraction.

The particular dynamics of innovation – the power of early adoption of standards and associated network effects tending towards market dominance – have profound consequences for how the value created is shared and measured.

The first major consequence is monopoly. Historically, industries naturally prone to being monopolies, for example railways and water, have been either taken into public ownership (e.g. in Europe) or heavily regulated (e.g. in the US) to protect the public against abuses of corporate power. But monopolistic online platforms remain privately owned and largely unregulated despite all the issues they raise: privacy, control of information and their sheer commercial power in the market, to name a few. In the absence of strong, transnational, countervailing regulatory forces, firms that first establish market control can reap extraordinary rewards. The low rates of tax that technology companies are typically paying on these rewards are also paradoxical, given that their success was built on technologies funded and developed by high-risk public investments. 74If anything, companies owing their fortunes to taxpayer investment should be repaying the taxpayer, not seeking tax breaks. Moreover, the rise of the ‘sharing economy’ is likely to extend market exchange into new areas, where the dynamics of market dominance look set to repeat themselves.