The digital economy firms operate across geographies and are beyond territorial control. Regulators have a lot of homework to do while prescribing rules for them .
In their book, the renowned Professor Erik Brynjolfsson of MIT and Andrew McAfee describe the “information economy” as “the second machine age”, as more people than ever are using Wikipedia, Facebook and Google, with thousands of new digital goods introduced each year. They also argue that billions of hours spent on Google and Facebook, among other digital goods and services, create large consumer surplus through reduced search times, collaborative projects, and so on. However, recent episodes on data leakage at Facebook has created uncertainty about the future of these firms. This has put regulators and policymakers worldwide in a difficult situation on how to prescribe rules and regulations for these firms. A look at the history, especially that of the US, provides some understanding of the tussle between technology firms and regulators. In the 1940s, the vision of the then president of the US, Franklin Roosevelt, created a huge network of highways throughout the country, enabling personal mobility at its best! Taking this as an opportunity, the big three automobile manufacturers—GM, Ford and Chrysler—grew in size and dominated the lives of the American people. Large, and often inefficient automobiles, operating at high speeds on the inter-state highways became norm. Spurred in part by Ralph Nader and his book Unsafe at Any Speed: The Designed-in Dangers of the American Automobile, the regulators woke up in the 1960s to tighten the regulation of the auto industry by prescribing stricter safety and later emission control norms.
Next, is “telecommunications”. Throughout most of the 20th century, the wireline telecommunications industry in the US was treated as a “natural monopoly”, with the principal beneficiary being AT&T Bell System, which was established in 1879 by Alexander Graham Bell. AT&T and its subsidiaries controlled the communication of the country’s population, inventing newer technologies, and at the same time, engaging in several practices that were seen as anti-competitive and anti-consumer. It finally ended when the Department of Justice, through the Modified Final Judgment in 1982, broke up its long distance and local access operations. With enactment of Telecommunications Act of 1996, competition was introduced and the dominance of AT&T was significantly reduced. The above episodes illustrate the following: (i) the regulatory intervention always follows technology, and at times, is far behind; (ii) regulators normally allow technologies to take their shape with minimal or no regulations in the interests of consumers at large; and (iii) when these tech firms become large and assume significant market power, and if there are any indications of market abuse, the regulators step in.
The digital economy firms have created enabling technologies in the areas of networking, data analytics, AI, and machine learning that pervades everyone’s life across the globe. In that process, the marketplace, augmented by strong network effects, has created near monopolies in messaging, search, social networks, and so on. The regulators have so far turned a blind eye to their market place behaviour, and not intervened in their innovations of newer technologies. However, these firms seem to be doing exactly the same as what auto firms and telecom firms did earlier. These firms have created useful solutions and services that have attracted billions of users. Using advanced technologies and the data collected from users, they have created personalised service offerings, creating huge consumer surplus. However, they are now in a quandary as the huge personal data, thus, collected is easily amenable for misuse and abuse, negating consumer welfare, as proven in the “data leakage” problem of Facebook. Hence, it is a question of time that regulators step in, as is evident in the cases against some of the digital economy firms in EU and the US.
However, there is a difference between these digital firms and their counterparts of the earlier years. The auto and telecom industries are jurisdictional in nature. Hence, they were easier to regulate in respective countries, even at the state and local levels. However, these digital economy firms (also called as over-the-top firms) operate across geographies and are beyond territorial control. Will there be any benchmark global regulation? And, if so, will it be applicable in all jurisdictions? Who will formulate and implement it? Some of these digital firms in areas such as e-commerce and transportation have both digital and physical systems (e.g., transporting items from fulfillment centres, providing transport services) in operation. While the physical systems come under certain territorial jurisdiction, digital components do not. Should regulation be applicable across both the digital and physical services/ products?
Hence, regulators have a lot of homework to do while prescribing rules and guidelines for these digital firms. Until then, let these firms wake up to the realities of regulation. They need to figure out the technology controls and interventions that can be put in place to minimise the negative effects, enabling regulators to continue the “light touch model” adopted so far to promote innovation.
Authors are professors at the IIIT, Bangalore