Digital Single Market
Digital Economy & Society

Innovation comes from platforms rather than from individual applications

Digital platforms are forming Platform Networks, which changes thoroughly their market power as well as the innovation process. A change in regulation can increase the potential of innovation and drive better practices across Europe.

The market dynamics and regulatory challenges related to two-sided and multi-sided platforms have become a hot topic in the EU over the last months. It is gradually becoming acknowledged that such platforms pose specific challenges to market regulation and innovation policy.

This is because of three characteristics:

  1. Multi-sided platforms connect at least two distinct but interdependent markets. This means that market analysis done in isolation is outdated. It also means that services such as WhatsApp, which only connect end users, are not platforms and should not be treated as such.
  2. Platforms exploit no traditional (direct) network effects, but cross-sided (indirect) network effects. While traditional network effects can also be found in telephone networks, cross-sided network effects run across markets (e.g. Facebook connects users, advertisers and app developers).
  3. The term platform describes a business set-up, not a sector. Digital platforms can be mobility (e.g. Uber), commerce (e.g. eBay) or content providers (e.g. Netflix), without being subject to current sectoral mobility, retail or broadcasting regulation.

These characteristics make platforms into very powerful, yet equally difficult to regulate, market-makers. It also results in the fact that innovation comes from platforms rather than from individual applications, which means that the organisation and configuration of platform markets is a strategically crucial endeavour.

All of this is compounded by an issue that is not yet widely discussed or understood, i.e. that the simple set-up of a handful of platforms around which markets gravitate is already becoming a thing of the past. As a response to the significant competitive advantage of being a platform, more and more players strived for a platform status. By now, we have whole ecosystems of platforms, operating next to each other as well as on top of each other in single or multiple value chains. For example, in the smartphone world, platform competition is no longer limited to IOS and Android, but also to Facebook Mobile, Facebook Home, iTunes, Spotify, Apple Music, YouTube and many other platforms. This multi-layered platformization leads to whole Platform Networks. In Platform Networks, platforms leverage network effects, but at the same time they curb each others’ market power resulting from them. Also, innovation results from attempts of all these semi-overlapping, competing yet often also cooperating platforms to outdo each other.

This means that regulation should strive, more than to clipping the wings of platforms, to maximising multi-layered platform competition, thus unlocking more competition and increased innovation. The currently discussed European approach of platforms would benefit from taking such a Platform Networks view on board.

The content of this opinion piece does not reflect the official opinion of the European Union. Responsibility for the information and views expressed therein lies entirely with the author.

Pieter Ballon - Director Living Labs, iMinds - Professor, VUB / Katharina Hölck - Researcher, iMinds-SMIT, VUB