Online Platform Competition Is Hard to Address

Online platforms possess unique gatekeeping power. By setting API design and policy, they have the ability to control who has access to critical aspects of the vast datasets and user bases they’ve built—things like a user’s social graph that enables a hopeful competitor to grow its own user base and establish itself. Once a platform is sufficiently scaled, and especially if it is dominant, it no longer has the incentives to grant access to its APIs to facilitate a healthy downstream ecosystem. The more vertically integrated a platform is, too, the higher the risk that it may not offer APIs with sufficient data and functionality for other companies.¹ Whereas our current antitrust framework may not sufficiently ensure platform competition, platform interoperability offers a solution to promote a more competitive ecosystem.

Online platforms do not always offer a single product or service, but often build complex businesses across a wide range of commercial offerings. This business model includes many business lines that are vertically integrated on top of one another—meaning that a single company controls more than one stage of the supply chain. Google’s advertising intermediation business, for instance, is largely vertically integrated in that it operates: (1) as a publisher ad-server (offering advertisers the opportunity to run ads on Google’s digital properties—anywhere from alongside certain Google search results to on Google’s websites, such as Gmail, Blogger, and Youtube)²; (2) as a supply-side platform selling inventory on behalf of publishers (optimizing inventory usage through Google’s Ad Manager to maximize ad views); and (3) as a demand-side platform buying inventory on behalf of advertisers (offering advertisers access to display, video, and mobile inventory in real-time through Display & Video 360, formerly DoubleClick Bid Manager).³

Online platforms are complex, but they share several characteristics that distinguish them from traditional brick-and-mortar businesses. Public Knowledge Vice President Harold Feld defines a digital platform as a product that meets the following criteria: “(1) a service accessed via the internet; (2) the service is two-sided or multi-sided, with at least one side open to the public that allows the public to play multiple roles (e.g., content creator as well as content consumer); and (3) which therefore enjoys particular types of powerful network effects.”⁴ Because these platforms deliver services over the internet, they are able to take advantage of economies of scale. Their costs of scaling the network are dramatically reduced compared to brick-and-mortar businesses that have to build out a physical network to reach customers.⁵ In addition, operating in a two-sided or multi-sided market reduces a firm’s costs for inventory and market research.⁶

Online platforms also enjoy network effects, which further entrench their market dominance. A network effect means that the value of the network increases with each additional participant. Through the internet, platforms benefit from being able to reach greater numbers of other users and businesses. When platforms operate with closed systems, such network effects can also affect competition. For instance, Facebook’s network effects from the 2 billion plus users on its network means that users may be reluctant to leave it for a competitor, especially if it means that the user has to expend substantial switching costs by rebuilding their personal networks, posting content, and more from scratch.⁷ Switching costs and network effects can therefore lock in a user by making them dependent on a particular firm’s good or service.

Online platforms also enjoy network effects, which further entrench their market dominance. A network effect means that the value of the network increases with each additional participant.

Given these dynamics, the dominance of a few online platforms reflects an unsurprising trend toward greater concentration. The rise of these platforms, in fact, can be attributed to hundreds of mergers consummated in rapid succession.⁸ Platforms are keen to capitalize on economies of scale and tap into network effects, especially through vertical integration and data consolidation.⁹

The complex, integrated nature of online platforms makes it challenging to address competition concerns under current antitrust law.¹⁰ Digital platforms do not always fit into clear, static market definitions that are foundational to traditional antitrust cases. They also operate in multi-sided markets that antitrust case law may not clearly address.¹¹ The fact that platforms are venturing out into new markets—many of which are rapidly consolidating—adds another layer of complexity for antitrust attorneys and economists to unpack.¹² Take, for example, Amazon’s 2017 acquisition of Whole Foods. The FTC cleared the deal and let the parties merge without issuing a second request to conduct a more thorough, formal investigation. The merger between a traditional supermarket and a digital platform with extensive e-commerce operations might have raised difficult questions about defining the relevant market. Many advocates raised concerns that the deal might enhance Amazon’s dominance in fields such as logistics, expand the company’s data trove on consumers, and allow the company to replicate its anticompetitive online tactics in the brick-and-mortar space.¹³ But it’s not clear that current antitrust law can address these concerns if the merging parties may not appear to directly compete.

The challenge for enforcers is how to measure dominance when the technology, market, and industry are constantly changing. Antitrust agencies must also be empowered with additional resources to improve their capacity for analyzing how market power can be leveraged through data and networks. Further, the case-by-case nature of antitrust enforcement means that even when antitrust interventions are applied, only the specific company involved is obligated to abide by the conditions mandated by the remedy.

The challenge for enforcers is how to measure dominance when the technology, market, and industry are constantly changing.

Antitrust enforcement operates ex post, meaning that enforcement might only come after the problematic behavior has occurred. Merger review is an exception to this rule, in that enforcers might be able to intervene if the likelihood of anticompetitive harm post-merger is apparent—and even then, merger conditions are often time-limited and the merged entity is not required to abide by them once they’ve expired. Additionally, whether an antitrust enforcer is successful in attaining a desired enforcement action depends on the facts of the specific case, the resources available to bring a case, and, if the enforcers file a lawsuit, the litigation outcome. Ultimately, antitrust enforcement requires a significant time investment, which does not necessarily sync up with the lifecycle of technological innovation and growth. Firms that find themselves excluded from a fair shot at competing—for example, because a dominant platform is engaging in anticompetitive self-preferencing and denying access to its API—might go out of business waiting for the outcome of a case challenging those actions.

Further, structural separation would not remedy all of the competition concerns that online platforms pose.¹⁴ Even if a platform is broken up, it could still enter into an anticompetitive arrangement in which only some downstream products are compatible with the platform through proprietary integration or an exclusive contract.

But requirements for interoperability could address some of these threats to competition. As a result, Congress should promote interoperability in new legislation, and the FTC, too, should promote interoperability when appropriate in antitrust enforcement to protect against the anticompetitive risks that arise from dominant platforms’ gatekeeping power.

Interoperability is all the more important when platforms are vertically integrated and, as a result, may have fewer incentives to offer open APIs on their own. Vertically integrated firms offer products that feed into one another along a single production vertical. In the absence of vertical integration, different companies usually produce a different product or service along a supply chain. When firms vertically integrate, however, they usually seek to tap into efficiencies gained from the supply chain integration, and give preference to their own supply chain components when designing products and services to the exclusion of other players in the ecosystem—in their API design, for instance. The more vertically integrated a platform is, the higher the risk that it may not offer APIs with sufficient data and functionality for other companies, particularly downstream businesses, to build products that are compatible with theirs.¹⁵ This practice may sometimes threaten competition, but our current antitrust framework insufficiently addresses these risks and does not promote interoperability ex ante (“before the event”).

Interoperability is all the more important when platforms are vertically integrated and, as a result, may have fewer incentives to offer open APIs on their own.

Vertically integrated platforms have incentives to build their API design solely to their own needs, tailored to their own specific apps, features, and competitive strategy. Twitter, for instance, vertically integrated by purchasing apps like TweetDeck (a social media dashboard application for managing Twitter accounts) in 2011,¹⁶ Tweetie (then a leading iPhone Twitter client) in 2010,¹⁷ and Summize (a search engine built specifically for indexing Twitter posts) in 2008,¹⁸ and as a result was in a position to discourage developers from using Twitter’s APIs to make apps that directly competed with their platform.¹⁹ Twitter rejected apps that relied on tweet feed via its API and revoked API access. This practice certainly harmed competition, but may not have been considered anticompetitive within our current antitrust framework because of the challenges in assessing the relevant market, market power, and consumer harm.²⁰

These risks also exist when a platform updates or expands its product offerings.²¹ For instance, there is a chance that a company may choose to replace older, more open technology with a substitute that is more closed and not conducive to interoperability. A company may also deliberately restrict access to its API as a strategy to deter would-be competitors. Evidence suggests that Facebook has employed this strategy in the past with regards to its API that gave third-party apps the ability to allow users to find and add their Facebook friends on their apps: Facebook turned off its friend-finding API access for Vine (an app owned by Twitter that allowed users to create six-second videos) in 2013 when it began to build out its own video product.²² Facebook said that this policy was geared at cutting off access to its social graph for “apps that [were] using Facebook to either replicate our functionality or bootstrap their growth in a way that create[d] little value for people on Facebook, such as not providing users an easy way to share back to Facebook.”²³ The same year, Facebook cut off access to its social graph for MessageMe, a messaging app that had previously been able to allow users to find and add friends from Facebook—just a week after it launched.²⁴ It did the same thing to Voxer, a calling and voice chat communications app that had had access to Facebook’s social graph through its API for over a year before getting cut off.²⁵ It’s worth noting that all three of these competitors ultimately exited the market or shut down—while this loss of competition may be clear, the anticompetitive harm from Facebook restricting its API access in this manner may be more difficult to prove.²⁶

Our current antitrust framework insufficiently addresses the competitive threat of online platforms’ unique gatekeeping ability via control over their own APIs. This practice falls outside of the antitrust theories that have historically addressed similar behaviors from firms: (1) refusal to deal and (2) the essential facilities doctrine.²⁷ Under the former, a monopolist refuses to do business with other firms or prevents customers or suppliers from dealing with the firm’s rivals (i.e., “I refuse to deal with you if you deal with my competitor”) to acquire or maintain its position in the market.²⁸ Under the latter, a monopolist obtains a competitive advantage by denying access to an essential “facility.”²⁹ Neither are entirely applicable to addressing a platform’s control over competitors’ ability to utilize certain aspects of its data and user base to build their own products and services. This distinction is largely because APIs and the underlying data are subject to a variety of other considerations, too, such as the need to protect data security and avoid fraud; these factors require some limitations in the form of access controls and restrictions on usage volume.³⁰ As such, antitrust law is an insufficient tool to address the competitive effects that platforms may raise through their API policies and lack of interoperability.