Many thanks for allowing me to send you this letter after the close of submissions for the review, so that it can be uploaded onto your system manually.
I write this letter on the basis of professional and personal concerns about the way digital platforms operate as monopolies or quasi-monopolies, and/or distort the data, products and services they provide. I have answered the following questions: 2, 3, 4, 6, 7, 10, 11, 13, 14, 15 and 16.
2 How and to what extent do online platforms shape and control the online environment and experience of those using them? (Effects on consumers, suppliers including SMEs, competitors and society)
Online platforms shape and control the online and offline environments and experiences of those using them by turning first-mover advantage into network-effects business models that lock-out the entrance of later competitors. The creation of a quasi-monopoly may not always be intended, but powerful negative effects occur nonetheless. As the first successful digital platform of a given type, they then have a free-hand to execute a wide range of shoddy, expensive and dishonest business practices, with negative impact on both suppliers and customers and ultimately society as a whole.
They conceal their quasi-monopolistic operation by the use of “chummy” language (“members”, “community”, “task-rabbits”); by using (poor quality) peer-to-peer monitoring that is open to abuse in the context of thousands, millions or billions of users; by using misleading or erroneous algorithms to distort the presentation of purchase options to customers; by imposing unjustifiably high transaction costs on users; by the lack of technological inter-operability between platforms exploiting the same business domain (c.f. inter-operability between telephone networks); by the lack of any (obvious) reference to external, real-world bodies to whom complaints can be escalated if necessary; by concealment of their business models which are based on very significant power asymmetries between individual users and the owners of the platform; by concealment of their ownership models and any potential conflicts of interest.
3 What benefits have online platforms bought consumers and business that rely on platforms to sell their goods and services, as well as the wider economy?
Online platforms have had both negative and positive effects. The major benefit is that online platforms enable sellers with items with specific features to be found by purchasers desiring items with exactly those features. This enables the increased development of viable niche markets, and potentially very significant reduction of waste. The benefits for the wider economy and society as a whole could be considerable, provided that the ownership of online platforms does not remain a vehicle through which a very few extract economic rents from vast numbers of people.
4 What problems do online platforms cause, for you or others, and how can they be addressed. (Describe particular experiences here.)
The main problem with online platforms is their operation as quasi-monopolies, and the shoddy, misleading or dishonest business practices this then allows. As a user and consumer, one frequently feels overwhelmed by the apparent ubiquity of these practices. I summarise a only few examples:
JustPark – misleading algorithms, supplier incentives to encourage deception, high transaction costs
JustPark provides a platform for those needing car parking spaces to book those owned by private individuals. On JustPark, suppliers can pay the platform to make their product “more visible” to customers. This means that the listing customers get about parking spaces is not a “true” listing of the products or services that best meet the requirements that the customer expressed. Rather, the listing customers get is that listing ranked according to the preparedness / ability of suppliers to pay the platform additional fees. Suppliers are told that if they pay to make their product “more visible” they will get more bookings. I don’t know if this is true; how could I be assured as a supplier that this really was true? What independent data access would I need to demonstrate this? Could I get my money back if it was not? Suppliers also have to pay for every booking they receive which is absolutely fine in principle; I have £1.50 deducted from each booking. I am entirely unconvinced that £1.50 is a fair charge for the volume and complexity of work involved since the only humans doing any work are the customer and the supplier, not the digital platform. Even with website creation, development, maintenance, salaries and overheads, £1.50 per booking seems excessive.
Invention of questionable train ticket “services” for customers on online platforms
Over the past 5 years or so, online platforms selling train tickets have started charging for new “services” that would previously have been provided as part of the purchase price of the ticket. One of these is insurance; customers are encourage to buy “insurance for their journey” to cover the costs of personal injury and loss or damage to personal effect, usually for £1 per journey per person. Individually, the amount is trivial; but aggregated over a digital platform can function as a means to extract sizeable economic rents. It is not clear whether online platforms offering this insurance are doing so because the purchase of a ticket is for an operating company that does not have public liability insurance. I would have hoped that all operating companies have valid PLI as a core condition of operation; if this is the case, why would I need to purchase additional insurance for my journey? If customers are invited to purchase insurance because the relevant operating companies do not have PLI, this should be made clear on the website at the point of offer and sale; alternatively, if the offer of journey insurance is additional to that of the operating company, then it should be clear (also at the point of offer and sale) whether the insurance purchased merely replicates that already provided or whether it extends it.
This year, I’ve also seen online train ticket sellers start to sell “refund permissions” that you must purchase in advance in case you wish to cancel your journey and ticket purchase prior to the date and time of travel. This might be commercially justifiable given that there is no consumer right of return of unwanted goods, but is vulnerable to being exploited within an online platform.
The Office of Rail and Road appear not to have picked up on these issues, probably because it appears trivial; however, the potential for abuse via online platforms with huge volumes of transactions is clear. Greater awareness of the “tricks of the trade” of online platforms should be therefore be shared with industry-specific regulators.
LinkedIn – creation of erroneous data by users not actioned?
I was astonished, a few years ago, to receive, on LinkedIn, an “endorsement” for 19 different skills from a person I had never met and did not previously know of. Even worse, this endorsement included some skills that I didn’t even understand (e.g. “LaTex” – I haven’t the foggiest what this is.) I immediately responded to the LinkedIn account recommending these endorsements to complain strongly; they claimed they were taken aback by them too. However, there was no process for me – or them – to pursue a complaint, or to report this as a problem so that new improved processes could be developed. Even worse, I have since been invited by LinkedIn twice to “increase my use” of their network by telling them what’s wrong with it. Twice I have told them about this episode; I have never had any reply.
Thus even if users report demonstrable falsity of data, no action is taken. This may maximise financial value for the owners, but it fundamentally undermines the value of LinkedIn for the users.
Over-reliance on naïve and simplistic peer-to-peer feedback and monitoring systems.
Peer-to-peer feedback and monitoring systems are frequently abused; on e-bay I found one user selling multiple scanned and pirated copies of books for 99p each (legal and chemical textbooks, popular non-fiction). E-bay had not noticed this. When I reported my concerns to e-bay (without ever contacting the seller in question), I received an email from that seller attempting to be threatening (“your actions have been noted and are very unwise”). I have no idea if e-bay improved its business practices as a result. If e-bay enables the sale of fraudulent goods, shouldn’t it be punished in some form? To whom can I report such events (I am in the UK, the seller was in Ireland; where was “e-bay uk” based?)? Why should I bother to report concerns if nothing happens?
Similarly, a friend who frequently uses Airbnb for spare accommodation reports being unable to leave negative feedback for other “community members” even when this is fully justified, because they will get an unjustified negative feedback in response, and this will harm their “community rating” and hence likelihood of future transactions on the platform. So they always leave blandly positive feedback. Who is responsible for this misleading information here? How can customers and suppliers be protected?
38Degrees – implicit political recruiting?
In the run-up to the 2015 General Election there was one 38Degrees campaign upon which I clicked in support; following it, and for several months afterwards, I was bombarded with emails from various leading Labour Party MPs (e.g. Danny Alexander). I have never given the Labour Party my email address, am not a member and have no wish to join. The only way the Labour Party could have obtained my email address was via 38Degrees; I am not aware that 38Degress ever asked me if they could do so and I am not aware that I ever gave them permission to do so – maybe it was buried in the small print?
I am very concerned that 38Degrees appears to have passed on my email address to a political party without my permission; at best, they did not make my action of consent to this clear. So I did a bit of digging around about 38Degrees. I thought it was a charity or something similar. It turns out that it’s a privately limited company by guarantee without share capital, with a use of 'Limited' exemption. Its activities are stated as: “94990 - Activities of other membership organisations not elsewhere classified”. Given the way they appear to have acted with my personal data, how can I be assured that 38Degrees is not a covert recruiting mechanism for the Labour Party?
How can these problems be addressed?
I explain some of the ways these problems can be addressed in my answers to (11), (12), (14), (15) and (16) below.
5 Are there wider social and political concerns?
In addition to the concerns I have expressed above, I am also concerned at the ability of online platforms to obtain extremely large amounts of investment that protect the online platform from the need to make a profit or cover costs for extended periods of time (15 years or more). This seriously distorts the competitive dynamic against the interests of real-world incumbents. The ability of Amazon to under-cut real-world shops whilst creating a quasi-monopoly is a case in point.
6 Is the EU right to be concerned?
Yes.
7 Is there evidence that some online platforms have excessive market power? Do they abuse this power? If so, how does this happen and how does it affect you or others?
The evidence that some online platforms have excessive market power is the very marked absence of multiple competing digital platforms, and the shoddy, misleading and sometimes dishonest business practices in which the existing platforms engage. I do not see any online digital competitor to the following: amazon, e-bay, Facebook, Airbnb, LinkedIn, JustPark. Other digital platforms are clearly operating as a cartel to constrain market supply in their favour e.g. secondary ticket touts.
Please see my answers to (2), (4) and (5) above for explanations of how excessive market power is abused. This quasi-monopolistic power affects me and others by:
10 Is consumer and government understanding and oversight of the collection of data by online platforms sufficient? If not, why not? Will the Proposed General Data Protection Regulation adequately address these concerns? Are further changes required and what should they be?
Consumer and government understanding and oversight of the collection of data is not sufficient; in some cases, consumer understanding is alarmingly low. I suggest that the review panel consult with the Consumers’ Association who have been doing excellent (if very small scale) work in trying to get its own members to recognise the strategic importance of these issues in recent years (e.g. in informing priorities for elections to Members’ Council); they may have a few useful insights to share.
11 Should online platforms have to explain the inferences of their data-driven algorithms, and should they be made accountable for them? If so, how?
Online platforms should be required to explain the inferences of their data-driven algorithms, and declare those parts of the algorithm where the contributors of data had to pay to get the platform to use it i.e. where suppliers pay to increase their supply’s “visibility” or where customers pay to increase the breadth or depth of supplies they access. In this way, the points at which appropriation of rents by platform owners (and hence distorting algorithms) are most likely to occur can be identified, and suppliers and customers make informed decisions.
13 How are online platforms regulated at present? What are the main barriers to their growth in the UK and EU, compared to other countries?
I am not aware of any regulation of online platforms at present. At present, the growth of competitors to the existing incumbents is effectively completely blocked.
14 Should online platforms be more transparent about how they work? If so, how?
In addition to the absence of market competition, users have been highly vulnerable to exploitation by online platforms through their own lack of understanding of the underlying business models. This has been compounded by the use of “fluffy” language by privately-owned online platforms. Therefore, online platforms should be far more transparent about how they work, in the following ways:
a) They should make it clear that they are businesses, who owns them and how (i.e. the type of organisation they are), where they are registered, the purpose of the business, their annual operating costs, how many (a) suppliers and (b) customers they have, and the number of their employees (expressed in Full-Time Equivalents). If they are owned by a charity, they should clearly state this, and what the objects of the charity are. If they have party political aims, they should clearly state which political party/parties they support, the political membership of all their officers and whether they make any donations to political parties.
b) A clear graphic should be created for each digital platform to show the network of relationships it mediates in its business model, and displayed on an easily accessible and explicitly named page on the website. All of the exchange relationships (dyads, triads or others) through which the digital platform enables money to change hands should be clearly shown on the graphic (not just those between users).
c) They should use accurate terms to describe the nature of the exchange relationships they mediate: i.e. users are best described as “suppliers”, “customers”, or “customer-suppliers”; failing that, “users” is an acceptable alternative. Users should be described as “buying”, “selling”, “trading”, or “exchanging” with each other. These terms should be open to use by all online platforms regardless of ownership or governance structure, provided the business model includes trade or exchange.
d) The terms “member” and “community” have been consistently misused by many online platforms, to convey “chummy” impressions of organisations created solely for the purpose of furthering the common good. This conceals the quasi-monopolistic and exploitative nature of the businesses that they often are. It is extremely rare that users are “members” of any legally-constituted body as a result of registering for website use, or that there is any real “community” (whether of geography or interest) underlying a digital platform. Therefore it should be illegal to use the terms “member” or “community” in the absence of user membership of a legally-constituted and democratically-controlled body or society.
e) The terms “member” and “community” should be reserved solely for those digital platforms that are owned by member-owned firms (e.g. co-ops and mutuals) or member-owned societies (e.g. Industrial & Provident Societies and “bencoms”). If use of a digital platform requires assenting to becoming a member of a legal body, then this should be made clear before assenting to digital platform use. This assent process must include clear and accurate statements of the name, registration details and officers of the legal body, including the type of legal body it is, the type and extent of member control (i.e. whether it is democratically controlled or not), the purpose of the organisation, and the procedures for ending membership.
f) In order to further 14c above, the development of a genuinely collaborative and resource-efficient economy, and avoid confusion with the co-operative and mutual sector, it should be illegal to describe the users of online platforms as “co-operating” with each other unless the platform is co-operatively owned. This is because the co-operative and mutual sector has fundamentally different principles of ownership from privately-owned firms, and is based on democratic decision-making. Given the way users of online platforms have been misled by “fluffy” language hitherto, they remain highly vulnerable to exploitation if they are described as “co-operating” on a privately-owned platform.
g) Where users use the online platform to work together for non-trade purposes (e.g. 38Degrees), the term “collaborate” should be used; the term “co-operate” should not be used. Again, this will help avoid confusion and reduce users’ vulnerability to exploitation.
h) Trusted independent bodies (e.g. The Consumers’ Association) may wish to have a role in explaining these issues to consumers at a generic level, and maybe recommending best practice and highlighting poor practice.
15 What regulatory changes, if any, do you suggest in relation to online platforms? Why are they required and how would they work in practice? What would be the risks and benefits of these changes? Would the changes apply equally to all online platforms, regardless of type or size?
Any regulatory changes need to be realistic, and to address two core issues: consumer understanding; the lack of effective competition.
Need for realistic regulatory changes
Some regulatory mechanisms that have been proposed seem very naïve. For instance, it has been suggested that the imposition of a 10% maximum on the amount of profit digital platforms can make from, say, selling secondary tickets will stop the extraction of economic rents. Such regulation will do nothing of the sort. At best, it will restrict some existing practices and enable the invention of new ones to maintain the extraction of economic rents. This in turn, will “require” the enactment of new legislation… This game of micro-regulatory catch-up is ineffective, expensive, and slow, and only ameliorates symptoms (e.g. the size of the economic rents that are extracted).
Consumer understanding
I wish to see my proposals under 14a-g enacted as regulatory changes, so that users better understand how online platforms operate and the ways in which they are vulnerable to being exploited.
These proposed changes have three risks: the first is that they will make no difference to consumer understanding of the issues; the second is that they will reveal some online platforms to be less “attractive” than they had hitherto seemed; the third is that online platforms will not want to comply. The first risk is less likely – there is increasing (if confused) public concern about online platforms. The second risk is nothing other than an ongoing risk for all businesses that operate in fair, competitive and dynamic markets. If the third risk actually occurs, it would merely substantiate the accusations of abuse of market power that are being made.
The lack of effective competition as a result of network effect
This is the core problem that needs addressing. I regret that space and time prevent me from answering this question. However, the key actions taken should be those to actively encourage and support market diversity and competition, with a focus on the structural relationships within the industry, and within online platforms, so that incentives and risks are appropriately aligned, and barriers to competition removed, rather than a focus on large quantities of very detailed micro-regulation (see Professor John Kay’s comparable arguments about the financial sector[1]).
Should these regulations apply to all online platforms, regardless of type or size?
Regulatory changes for improving consumer understanding should apply to all online platforms, regardless of the domain in which they operate or their size.
Early enthusiasts of computing, the internet and “big data” often claimed that the underlying technology would, of itself, enable more innovative and democratic models of exchange and interaction, because the exchange of “bits” was technologically very easy and virtually “free”. The development of most online platforms in recent years have shown that this is not the case; the ownership model and business purpose of the first successful online platform in a domain has a hugely disproportionate effect on the types of exchange and beneficiaries that results.
Ultimately, the greatest transparency about how a business is run is provided by member-owned businesses (e.g. worker’s co-ops, producer co-ops or consumer co-ops), because in this organisational form the business incentives of owners and stakeholders are optimally aligned.
By aligning the business incentives of actors, member-ownership of multiple online platforms could be a far more effective solution than extremely detailed, complex and post-hoc micro-regulation that attempts to ban every possible disreputable practice – provided that regulation addresses the lock-in effects of network businesses. (Sadly, the issue of whether member-owners have the competence to understand business nformation cannot be guaranteed. However, this should not be held against member-owned businesses as their unique drawback; it applies to the owners of all types of businesses.)
Co-ops and mutuals have a long and proud tradition of outcompeting business models based purely on monopolistic brokerage and of aligning incentives so that both benefits and risks are responded to appropriately. Their contribution to a properly competitive online platform sector should be actively welcomed and encouraged.
16 Is this issue best dealt with at EU or member-state level?
The question of whether this issue is best dealt with at EU or member-state level (or others) depends on the reach of the digital platform and its exchange. If a digital platform, or a part of it, is restricted to operation within a member-state - for instance, JustPark.com provides some parking-sharing within the UK, and some within the USA – then the issue can be dealt with at the level of member-state level first. It is unlikely that there will be many users seeking frequently to supply parking spaces in the UK and frequently to purchase them in the USA, for instance. However, for other digital platforms such a clear demarcation will not be possible, and thus trans-national solutions may be required.
Summary
The development on the online platform sector has revealed numerous ways in which online platforms extract economic rents from suppliers and customers. These shoddy, misleading and dishonest business practices continue because of the lack of effective competition against quasi-monopolies. These quasi-monopolies were possibly never intended by some of the online platform owners, but are the consequence of being a pioneering business using a new technology that is far superior at connecting very large numbers of people than the previous technologies.
In the 21st century, we urgently need business innovation of myriad forms to address our planetary challenges – issues such as batteries for energy storage, obtaining sufficient drinking water, new methods of agriculture to provide sufficient food for all when the availability of fertile agricultural land is decreasing. It is vital that investment and entrepreneurial effort should be encouraged and directed towards these sources of competitive advantage, not frittered away on monopolistic brokerage businesses that use network effects to extract increasing, and sometimes hugely disproportionate, economic rents from vast numbers of people.
I am delighted to contribute to the House of Lords review, and I very much hope that effective action will be taken to enable a fair, competitive and genuinely innovative online platform marketplace in both the UK and EU.
21 December 2015
[1] Kay, J. Other People’s Money: The Real Business of Finance (2015)