Analysis Google and digital competition

19/07/2018

Miguel Marín is an economist and consultant


The European Commission has just imposed a historic sanction on Google’s parent company Alphabet for allegedly limiting competition in the management of Android, the operating system of free access and configuration that Google itself put on the market, as well as a couple of applications developed by the American technology giant, which it ‘’recommends’’ to use when assigning Android’s license for free.

Of course, this article is not questioning the legal bases of the decision, which I am sure it has and that they are very well assessed. I do not think that anyone would question the fundamental principle of any rule of law that if someone breaks a rule they should pay for it. However, it may be interesting to ask ourselves whether the competition rules governing the decisions of the European Commission and the national regulatory bodies in the digital field respond adequately to the ultimate aim of any competition policy, which is to eliminate market failures in the interests of maximizing consumer preferences. In other words, does it make sense to evaluate the competitive behavior of the major technological platforms under the parameters of a competition policy designed in the twentieth century?

No one doubts at this point that the digital revolution is entailing a profound transformation of the market structures that we studied at the University. The new digital facilities have allowed the appearance of new forms of market in which consumer and producer are confused, in which the market power of consumers increases significantly by the greater possibilities of centralization of demand; market structures in which traditional balances and optimums are altered, in which new sources of economies of scale appear, new optimal business dimensions that maximize consumer preferences and well-being and, by the way, the largest group of people that can be trained in Spain and in any developed country.

In terms of its power to transform business behavior and strategies, the digital revolution is so profound and is advancing at such a dizzying speed that it is difficult to adapt regulation to the changes that are taking place. Nevertheless, it is possible to detect some trends in the competitive dynamics that are beginning to consolidate and that should surely be taken into consideration when evaluating the competitive behavior of large technology companies. Perhaps the most obvious one is what we might call dynamic or potential competition, that is to say, the greater vulnerability in the digital sphere of traditional dominant positions. Illustrative examples of this reality are not lacking. Yahoo, Nokia, Kodak or MySpace, avant-garde technology companies that recently came to hold quasi-monopoly positions in their respective markets and that lost them suddenly dragged by the tsunami of innovation implied by the revolution underway. Fortunately, in the digital world, no one is safe from tomorrow's appearance of a new mathematical algorithm that renders your search engine, your applications or your ability to develop them obsolete.

In a world with tens of thousands of engineers in search of this formula, the dominant positions of companies are necessarily more vulnerable, which conditions growth strategies. This is one of the reasons that explain the aggressive strategies of large technology companies trying to conquer new traditional markets (insurances, financial products, utilities, etc.) by taking advantage of the trust that consumers have placed in them or opening new markets in which they can also reach a dominant position no matter how ephemeral it may be.

In this way, technology companies are generating competitive tensions in many markets that should be considered as positive, since they affect prices and the variety of goods and services available to consumers. The example of Google and its model of free assignment management of Android is very illustrative. This model drastically reduced the cost of entry for mobile phone manufacturers and operators trying to bring Android devices to market. Today, there are around 1,300 brands of Android devices, there is a growing range and for all pockets, with phones ranging from the cheapest, at 45 euros, and premium models, at more than 750 euros. The Android model has also enabled 1.6 million European-based application developers to offer their products and services to a global market, through the 2 billion compatible Android devices currently in use; something that, by the way, the European Commission's decision would put at risk by punishing the compatibility clauses required by Google in its licensing agreements.

This would mean less innovation, less choice and less competition. That’s not just bad for Google. It would be an unwanted situation for developers, who would face greater fragmentation, barriers to reaching consumers and a loss of economies of scale. Also for phone manufacturers and operators, who would see their costs increase but, most worryingly, for consumers, who would see less competition, less innovation and higher prices.

The digital world is generating new ways of competing and perhaps it would be wise to take into consideration the impact of technology companies in the systemic competition of the economy. No one can deny Google's dominant position in the technological world. A position that, it is true, has been achieved by gaining the trust of consumers of its products. Nor is it easy to deny that Google's presence in the markets is entailing a transformation of competitive and innovation dynamics which, unless I am mistaken, are not causing any harm to consumers. In fact, it is hard to believe that European consumers feel attacked because a company gives them an open source operating system and recommends two of the 64 million applications that were downloaded in Europe in 2017, something that, by the way, all the new operating systems that have been emerging have incorporated.

Trying to ride the digital revolution with the instruments and regulatory foundations of the 20th century is a big mistake. Not only because of the unjustified damage that can be caused to certain business projects, but because of the many opportunities to improve the welfare of citizens that we may lose. It is difficult to understand the political rampage against the big technology companies, especially if they are to become a complementary source of funding to our battered welfare systems. It would be better for us to change our approach and look for a more cooperative one than the grotesque plundering of the profit and loss accounts of companies leading global innovation and the digital revolution. Don't let us end up drying the dairy cow.

Or perhaps this is all just a show of force by the European Commission sending a message to Trump about Europe’s real ability to harm US businesses in response to the new-look protectionism of the US President. Let us be clear, then, that this kind of shock always ends up in the face of one’s own consumers. By the way, if anyone doubts my impartiality, I’m an Apple world abductee.

Translated by David Outeda

#Economy #Tecnología #Taxation #UE #competencia