One of the running themes I write about is Platform Confluence: the merger of several platforms within an ecosystem to better monetize its users and increase the value of the whole (original article). It’s also a network effect. The benefit is greater than the sum of all parts. Not many companies have more than one platform. Integrating them is not just a driver of lock-in effects. It also brings companies closer to the edge of anti-competitiveness, and sometimes beyond.
Second-order effects of Platform Confluence
As ecosystems grow, they tend to compete with each other. Apple and Google compete in podcast, smartphone operating system, payments, entertainment, wearables, apps and storage markets. Google and Amazon fight for shopping, advertising revenue, and search. Amazon and Facebook compete for advertising revenue and merchants. That list isn’t even exhaustive and I haven’t even compared all products and markets, but it proves a point: all tech eco-systems eventually meet.
Eco-systems grow their first platforms in a core competency (search, social, e-commerce, consumer hardware) and then add more platforms in growth markets. A good example is Zoom, which transitions from a point solution or app (video calls) into a real platform by adding a marketplace and 3rd party integrations (“Zapps” = Zoom Apps). If Zoom were to release an own productivity management tool like Asana, Jira, or Trello, that would qualify as a second platform that it could merge with the video calling platform to build out an ecosystem. Atlassian did that by merging Jira, Confluence, Bitbucket, and other apps.
The challenge arising from Platform Confluence is that companies are able to leverage their success in one market to gain an advantage in another market. It’s the classic supermarket pricing strategy: offer a valuable product at a loss, but place it in the back and put enough high-margin products along the way to come out bottom-line profitable. What else allowed Google to provide Google Docs, Gmail, or Chrome for free?
And that brings me to Google’s lawsuit and anti-trust.
Tech’s antitrust and Google’s lawsuit
On Tuesday, 10/22/2020, the US Government filed an antitrust lawsuit against Google, claiming that the search giant gains an unfair advantage through exclusive deals with companies like Apple and provides a declining consumer experience based on its monopoly position.
Until the internet unbundled newspapers, they kept the advertising side of the business strictly separated from the journalistic side. The moral code was so strong, journalists called “the wall”.
That same wall separated organic from paid results on search engines and other online platforms. And just as for newspapers, it’s coming down right now and changing the landscape. Organic and paid results blend into each other.
I extensively wrote about Tech’s anti-trust hearings and especially the accusations against Google. I concluded:
In the recent hearings, it became clear to me that Platform Confluence navigates businesses closer to regulation. Most points that Big Tech was criticized for came down to unfair use of the huge troves of data it sits on. That’s only possible when merging the data from many platforms and leveraging it for monetization.
The antitrust report cited in the New York Times brings the biggest issue to the point: “A significant number of entities — spanning major public corporations, small businesses and entrepreneurs — depend on Google for traffic, and no alternate search engine serves as a substitute.“
Platform Confluence creates dependencies. Ecosystems create markets, and reckless behavior with these markets leads to anti-competitive behavior. Apple creates a market for accessories, Google and Facebook create a market for any business that wants traffic, Amazon creates a market for merchants. Companies like Tripadvisor, Booking, Yelp, Genius, Spotify, or Hey are examples of what happens when Ecosystems treat the dependencies they create too irresponsibly, as I covered in the nasty side-effects of Google Search Traffic.
If my theory holds true and ecosystems bear the risk for anticompetitive behavior, the question is how to make sure they evolve in a market-friendly way. The answer is to look at “ecosystem building shortcuts”: acquisitions.
All big players had a moment in their history at which they bought another platform (often aggregators) that made them exponentially powerful and guaranteed growth for decades: Google bought Youtube + Doubleclick + Waze + Fitbit, Facebook bought Instagram + Whatsapp + Oculus, Amazon bought Wholefoods + Twitch + Ring, Apple bought Beats. Taking a second look at M&A and defining regulation for such shortcuts could be a way to create fairer markets.
Just a click away?
Google came back at the claims in a blog article, stating that users are free to choose what search engine or browser they use. Users chose Google because it’s a better product.
However, Google was able to entrench itself through Platform Confluence and capitalizing on the search data it got. The compounding effects from data allowed Google to build a massively better product. That in itself is not anticompetitive – just good Growth.
The problem is the things happening around network effects. Why is Google paying Apple billions of US Dollars, if users can simply switch their default search engine and browser to Google and Chrome if it’s a superior product? Why did TikTok, the only true competitor to Facebook, had to come from China to grow to a competitive size?
The goal of antitrust is not to punish companies for being successful, but for gaining unfair advantages. Equality of opportunity, not of outcome.