Digital firms: Why do they have so much power?

The first important feature of these firms, they move into the immaterial world.The immaterial world is a huge compound of data, but it represents the reality, after all the zeros on your bank account match a real value that you own.

The only thing is that you cannot touch them.

The immaterial world has other features: the goods do not need additional cost to be shared, sold, reproduced, and stored. That’s a huge difference with the material economy.

Marginal costs are those you have to spend to produce a further unit of a given product. In the immaterial ecosystem they are equal to 0, whereas, in the real world, they are constantly growing.

So, in a nutshell, it is extremely more convenient to produce and operate (store, share, etc.) in the immaterial world.

We talked about production before. Well if I name companies like Amazon, Facebook, eBay, Airbnb, Bookings, Expedia…what do they have in common?

They do NOT produce anything.

Yes, their role in our economy is just to intermediate between producers and buyers. They are just like a pipeline that connects two points.

And here comes the interesting part of my thought.

Even though they are not producers, they serve an essential task, connecting. They can do so thanks to the features of the immaterial world, and thanks to the fact that the technologies these firms hold, combined with the enormous amount of data (we) provided, let them have total control of that intermediation market.

So far so good…right?

Well, there is a problem here. The problem dwells in the last sentence I wrote in the previous paragraph. THEY HAVE THE TOTAL CONTROL OF THE INTERMEDIATION MARKET.

They can impose their rules on producers or providers or whatever product/service.

Let’s look at some examples:

1. Airbnb intermediates the renting market, along with a few other entities such as Booking (which operates for Bnb or Hotels/Motels).These firms provide a service, which is finding more clients. But the rest of the costs are held by owners, which in return have to pay a tariff (something around 25%) to Airbnb-Booking. The issue is that this tariff does not relieve them from paying the usual costs (bills, light, gas, electricity, cleaning, repairing damages, staff, and so on).So the final result is that more revenues are eroded from owners’ pockets, in favor of these digital giants. [They increase competition (which drags down prices) and impose extra tariffs, all at the expenses of intermediated owners]
2. Another sensitive issue is the one related to social rights. These immaterial firms do not pay any contribution to the workers they employ. See the case for Uber or Deliveroo. The drivers/riders sure get an extra (flexible) income thanks to these companies, but their social rights are not guaranteed. There is no pension contribution paid by Uber nor Deliveroo. In case of injuries, their jobs are not saved. This process causes uneven distribution of wealth, which flows more and more into already rich pockets.
3. It is not a novelty that Facebook, Instagram, Twitter, YouTube, etc., are becoming more and more important to our lives and economies. Many people are making a living out of their image on those platforms, and an even greater number uses them to sponsor their services/products. So no doubt that they are doing something good. But remember, these firms have total control of the social media market. They decide the rules of the game, and they are, after all, private people.

This means that if for whatever reason your contents are tagged as not worthy to be on the platform, they are easily removed, no matter what you do.

In all the above-mentioned cases a specific company controls the totality or a huge share of a certain market. That’s because they have created a new market, therefore the digital competition was close to 0, leading them to become Monopolists. Or better, Immaterial Monopolits (“old” monopolists are in control of the production of products, like the robber barons at the beginning of last century).

The possibility to become monopolists comes from the experience (most of these firms were first comers) and the challenge to compete with them due to:

1. An ever-increasing amount of data that these companies have been able to assemble, that allows them to create a natural entry barrier to that market (if you wanna compete you need to know information about customers, after all, you are intermediating them).
2. Lock-in and Net effect. When you start using an App such as Whatsapp, it will be extremely hard for you to switch to a competitor because all your contacts are still using Whatsapp (Net effect) and because you do not want to learn from scratches how to use a new platform (lock-in effect).
3. These firms are now huge, with huge profits. Whenever a new startup is going to pose a risk to their market, they have the power to buy it and eliminate the threat while consolidating their position as Monopolists (that is exactly what Facebook did with Instagram).

So: we are intermediated by giants who can control our data and an increasing amount of our jobs.

What are we left with? What is our future? Is technology going to control everything (if it is not already doing so)?

Creating the right legal framework could be the answer. There are some examples of possible solutions worth looking at.

The telecommunication market is another interesting sample. Firms providing sim cards were forced to create a network that would allow customers to call each other even if they had different providers (having a Tim sim card did not prevent you from calling or messaging a Vodafone one).

The same process could be applied to social media platforms such as Facebook and Snapchat just to mention some. By doing so more firms would have an incentive in joining the market, fostering competition and therefore reducing Tech Giant’s power.

Another way of dealing with this issue would be the so-called eastern-method. Nationalization of big firms, therefore the Government would become the sponsor and the leader of the market.

This kind of approach would require a longer debate, there are several implications in having this kind of economy. It is important to keep in mind that acquiring a Tech Giants are necessary astronomical ciphers. Also when a firm becomes big enough, it loses its defined borders, escaping in the country that offers the best economic conditions, so an acquisition seems to be a less probable scenario.

To give a conclusion let me add that the EU is already moving in favor of more regulations. The Recovery Plan (now Next Generation EU) promotes heavier taxation on those digital companies that now easily escape them by finding individual agreements with more “flexible” countries.

The “fight” against Silicon Valley’s leaders started a few years ago when the European Commission fined Google 2.4 billion for operating against the competition. And with the damages created by the Covid-19 pandemic, this crusade appears to have increasing consensus among governments.

Sources:

Capitalismo Immateriale (Stefano Quintarelli) https://blog.quintarelli.it/capitalismoimmateriale