Copyright © 2018 The Brattle Group, Inc.

Regulation of digital and intangible assets HOW DIGITAL PLATFORMS DISRUPT MARKETS

PRESENTED TO ACCC & AER Regulatory Conference PRESENTED BY Eliana Garcés 26-27 July 2018

brattle.com | 2

Agenda

 What is a digital platform? – Definition – Economic characteristics – Data

 Markets on digital platforms – Efficiencies and barriers to entry – Platform intermediation – Data disruption

  Take away points

brattle.com | 3

What is a digital platform?

brattle.com | 4

What is a digital platform? Definition

There is no definition of ‘digital platform’

One proposal “A system of technology and connectivity standards that allows a variety of users to interact on a digital support in a variety of ways such as communicating, sharing content and information, or perform commercial transactions”

Regulators often narrow the scope of interest o Internet based o Commercial o B2C intermediary (latest EC regulation)

brattle.com | 5

What is a digital platform? Economic Characteristics

Platform exhibit very large reductions in transaction costs

Low search costs

Cheaply interconnects a very large amount of people (hundreds of millions)

Information costs Information on parties, products, price comparisons, localized searches

Communication costs Easy to use interfaces

Processing costs Payment, delivery, posting, sharing, publishing

brattle.com | 6

What is a digital platform? Economic Characteristics

Network effects Each user’s valuation of the service increases with the total number of users (of same or different type)

Increasing returns to scale The service becomes better and more efficient as the size of the platform increases

Economies of scope Offering a service becomes cheaper or better if some services are already offered

brattle.com | 7

What is a digital platform? Economic Characteristics

Economic characteristics work to amplify success ‘Know how’ and ability to realize efficiencies plays an important

role in platform success

Successful platforms can grow fast and can ‘conquer’ a market

Successful platforms can often enter new activities efficiently

Users may experience economies of scope when using services on the same platform

brattle.com | 8

What is a digital platform? Data

 Platforms can easily collect data Tracking on own sites Provided by user (logged environments, user generated content) Collected by tracking on third parties sites Acquired from data sellers

 Platforms can monetize data Targeted advertising Targeted content, targeted offers Price discrimination Forecasting, planning, market intelligence Resale of data Innovation input (AI)

brattle.com | 9

What is a digital platform? Data

Data has an increasing impact in platform performance Data can exhibit increasing returns to scale Data is a source of economies of scope Not all data is equal (Veracity, velocity, volume, value) Data analytics capabilities matter

Platforms vary in their reliance on data for monetization Business models will be impacted by the importance of data in profit generation (Apple iOS vs Android)

brattle.com | 10

Markets on digital platforms

brattle.com | 11

Markets on digital platforms Efficiencies and barriers to entry

 

Platform service (Search, publishing,

shopping)

Data collection

Service Improvement

Platforms can generate a virtuous loop that may be difficult to exactly replicate

brattle.com | 12

Markets on digital platforms Efficiencies and barriers to entry

 Regulators considering ‘entry points’ to address unfettered expansion Data access and control – Example: more user control

Assessment of data intensive mergers

Possible anticompetitive effects of tying of services

Can also argue dynamic competition is working well

brattle.com | 13

Markets on digital platforms Platform intermediation

 Platforms may become powerful intermediaries  and may also compete with business users

Platform (Search, publishing, shopping)

Own service

Rival service Customers

Data & operation services

?

data

brattle.com | 14

Markets on digital platforms Platform intermediation

 Regulators looking at possible abuse of gatekeeping role Fair terms in B2B relations

Pricing restrictions, contractual terms, access to efficiencies, placement

Fairness in user relations, social considerations

Algorithmic ranking and decision making on what gets promoted Search results , retail offers, news content

brattle.com | 15

Markets on digital platforms Data disruption

Data monetization disrupts business models

‘Atypical’ commercial practices to incentivize engagement Low and zero prices for services with high price elasticity of ‘engagement’ Favoring of content with high click-through rate

Online advertising puts all content in competition on platforms

Value is being increasingly appropriated by those who can capture the power of data analytics

Value chain control lies in data and user interface

More traditional businesses struggle to compete Business reorganizations and acquisitions

brattle.com | 16

Markets on digital platforms Data disruption

Data monetization disrupts privacy

Social trade-off: Data efficiencies rely on data collection Optimal point of control for privacy is unclear

Regulators: What benchmark to use? Users: Inconsistent behavior (privacy paradox) Firms: Problem with incentives

Tension between competition and privacy No overwhelming evidence of privacy as a dimension of competition Restrictions to data usage impact small firms more (ex GDPR)

brattle.com | 17

Assessment of platform conduct

 Understanding platform business model is important for assessment of conduct

How does a platform make money? What are its incentives? How does it coordinate different users? Account for multisided-ness, interdependencies, externalities

brattle.com | 18

Take Away Points

Platforms succeed by generating transaction efficiencies Economic characteristics of platforms can result in the most successful ones ‘taking over’ a market Data and its usage may reinforce this effect but is mostly a disruptive force Must develop better analytical tools to discern efficient business model decisions from illegal conduct

brattle.com | 19

Thank you!

brattle.com | 20 Privileged and Confidential Prepared at the Request of Counsel

PRESENTED BY

Eliana Garcés Principal, Washington D.C. +1.202.419.3358 Eliana.garces@brattle.com

Dr. Eliana Garcés is a Principal at The Brattle Group with broad experience in antitrust enforcement and regulatory design. Dr. Garcés has held positions in both government and the private sector, including previous economic consulting experience in the United States. She was in the cabinet of Vice President Joaquín Almunia, the European Commissioner responsible for competition policy in 2010-2014. In that position she supervised antitrust and merger investigations in information technology, telecommunications, financial services, and energy market. She holds a Ph.D. in economics from University of California and a Licenciaura in Economics from Universidad Autónoma (Madrid).

The views expressed in this presentation are strictly those of the presenter(s) and do not necessarily state or reflect the views of The Brattle Group, Inc. or its clients.

brattle.com | 21

The Brattle Group provides consulting and expert testimony in economics, finance, and regulation to corporations, law firms, and governments around the world. We aim for the highest level of client service and quality in our industry.

About Brattle

OUR SERVICES

Research and Consulting

Litigation Support

Expert Testimony

OUR PEOPLE

Renowned Experts

Global Teams

Intellectual Rigor

OUR INSIGHTS

Thoughtful Analysis

Exceptional Quality

Clear Communication

brattle.com | 22

Our Practices and Industries

ENERGY & UTILITIES Competition & Market Manipulation Distributed Energy Resources Electric Transmission Electricity Market Modeling & Resource Planning Electrification & Growth Opportunities Energy Litigation Energy Storage Environmental Policy, Planning and Compliance Finance and Ratemaking Gas/Electric Coordination Market Design Natural Gas & Petroleum Nuclear Renewable & Alternative Energy

LITIGATION Accounting Analysis of Market Manipulation Antitrust/Competition Bankruptcy & Restructuring Big Data & Document Analytics Commercial Damages Environmental Litigation & Regulation Intellectual Property International Arbitration International Trade Labor & Employment Mergers & Acquisitions Litigation Product Liability Securities & Finance Tax Controversy & Transfer Pricing Valuation White Collar Investigations & Litigation

INDUSTRIES Electric Power Financial Institutions Infrastructure Natural Gas & Petroleum Pharmaceuticals & Medical Devices Telecommunications, Internet, and Media Transportation Water

brattle.com | 23

Our Offices

BOSTON NEW YORK SAN FRANCISCO

WASHINGTON TORONTO LONDON

MADRID ROME SYDNEY

THE POWER OF ECONOMICS brattle.com