Boundless digital platforms have been the engines of Big Tech’s astronomical growth, but they have grown so large that regulation is at hand.

Computing platforms were created by tech behemoths to dominate the e-commerce and advertising worlds — build it, the logic went, and developers and consumers would come. But in erecting digital platforms that reach millions of people and pump out billions of dollars in revenue, the major architects at Apple Inc.
Google parent Alphabet Inc.

Facebook Inc.
and Inc.

seized the attention of federal lawmakers and regulators.

Establishing a digital platform had attained mythical status for legendary executives such as Steve Jobs, Jeff Bezos and Larry Page. The Wall Street Journal called platform “the word that most defines the [tech] industry’s boom over the past decade,” and platform-based businesses make money in a variety of ways — the defining characteristic being that its core value proposition flows from the connections it facilitates between other businesses and consumers.

Such platforms have befuddled regulators because they do not follow the behavior of typical monopolies, in that they do not charge for their products — they are specifically designed to allow other businesses to sell goods and services to consumers. For consumers, the costs include absorbing advertisers’ ad spending by paying more for their products, being tracked and shown personalized ads, and giving up privacy.

“What’s so fascinating is these platforms seemed like scrappy upstarts, trying to change the world, and make our lives more convenient,” Nabiha Syed, a lawyer and president of The Markup, a nonprofit newsroom devoted to uncovering inequities perpetrated by Big Tech, told MarketWatch. “But it has locked us into a platform that can do anything with your data. The network effect is big enough to turn these companies into gatekeepers of the internet, which is so concerning to regulators around the world.”

Barron’s Live on Wednesday: Join reporter Jon Swartz and Nabiha Syed for a live discussion about Apple, antitrust and platforms at noon Eastern time

While regulators are seeking to define what a digital platform is, lawmakers are debating on what legislation can keep platforms in check, with a focus on Apple and Google’s app stores. The first fissure came Tuesday, when the South Korean National Assembly banned large app-market operators like Google and Apple from requiring software developers to use their payment systems, threatening their lucrative commissions of up to 30% on digital sales.

Apple has said the bill “will put users who purchase digital goods from other sources at risk of fraud, undermine their privacy protections, make it difficult to manage their purchases,” and lead to fewer opportunities for South Korean developers.

Don’t miss: It’s about to be a hot antitrust autumn for Apple

Wilson White, senior director of public policy at Google, said it was too early to gauge the “negative impact” of the vote given its “rushed process.”

Members of the U.S. Senate are also attempting to rein in the powers of Google and Apple’s app stores.

“Google is by far the most powerful of these businesses, in the case of search. It is certainly the business that is closest to being a natural monopoly,” said Jonathan Knee, author of “The Platform Delusion: Who Wins and Who Loses in the Age of Tech Titans,” due Sept. 7. Knee is a Columbia University business professor and colleague of Tim Wu, an architect of the Biden administration’s policy on Big Tech regulation.

“It wouldn’t be crazy for there to be a quasi-utility aspect in terms of oversight,” Knee said. “On the flip side, passing a law that says it is illegal for a person to conveniently buy a product from two different [computing] platforms is brain-dead.”

The current iterations of platforms from Apple and Google aren’t new — they’ve simply taken decades-old concepts and run with them. The progenitors date to shopping malls that connect retailers and shoppers, starting with the Southdale Center in Edina, Minn., in 1956 and still operating today.

Movie theaters are similarly platform businesses, author Knee points out. “Exhibitors negotiate with studios to get the best films on the best terms and market the experience to local moviegoers,” Knee writes in his book. “The ability to get the best films is in part a function of the credibility of their claim to be able to attract the biggest possible audience, and their ability to fill the theater will be in part a function of the films they secure.”

The challenge, Knee and others argue, is how do you legislate when tech companies are different and work together? “There was a strange hodgepodge of incredibly aggressive actions by the Trump administration to address huge loopholes in antitrust law, that was merited,” he said.

The quandary is how to get there. Examples of true digital platforms abound, according to Knee: Operating systems that connect software developers and users (Apple and Microsoft Corp.

), a marketplace that connects buyers and sellers (Amazon), social networks that connect communities (Facebook), a search engine that connects advertisers and digital publishers with searchers (Google).

Apple and Google have garnered the most attention of late, through two high-profile antitrust lawsuits filed against them by Epic Games Inc., a Senate bill aimed squarely at the business practices of their respective app stores, and a series of European fines levied against Google.

Epic vs. Apple: The (predicted) verdict is in

What has drawn the scrutiny of legislators and regulators: Apple and Google make tens of billions of dollars from their app stores. The iPhone maker amassed gross profit of $35.5 billion on revenue of $53.8 billion last fiscal year in its Services segment that includes App Store sales along with subscription services and other online offerings. Through the first three quarters of its current fiscal year, Apple has raked in $34.8 billion in gross income on revenue of $50.1 billion. Google’s Play Store revenue is included with other services as well, and the segment produced sales of $21.7 billion last year and more than $13 billion in the first half of this year.

FAANG businesses were valued at $6 trillion at the end of 2020; in 2015, they were worth less than $2 trillion. Their appreciation over that time was more than three times greater than the overall growth in value of the S&P 500 index

The largess extends to the business agreement between the companies: Google’s payments to Apple to be the default search engine on iOS were $10 billion in fiscal 2020, higher than a previous estimate of $8 billion, and could reach $15 billion in fiscal 2021, AB Bernstein analyst Toni Sacconaghi said in a note last week.

Epic claimed in federal court in May that Apple gouged developers with onerous commission fees of up to 30% to conduct business on the App Store while often competing head-to-head with similar apps. If developers refused to comply, they were excluded from one of the world’s premier distribution platforms for mobile goods. Epic is pursuing the same legal strategy against Google in a case that could go to court in 2022.

Apple did make some concessions to small developers under a legal settlement announced on Aug. 26, allowing them, most importantly, to communicate directly with customers about alternative payment options, with customers’ permission, using information collected inside their apps.

Read more: Apple will change its App Store practices in legal settlement

MIT economist Richard Schmalensee, who testified on behalf of Apple during its antitrust lawsuit against Epic, argued the App Store is a two-sided marketplace, a concept he and David Evans, chairman of Global Economics Inc., have written about extensively, including in an amicus curiae brief on behalf of American Express Co.

in a 2018 U.S. Supreme Court case. (A federal judge’s decision in the case is expected in September.)

American Express barred merchants from steering their customers toward rival credit cards with lower swipe fees on the premise that AmEx’s higher fees helped fund cardholder perks that benefited consumers. The Supreme Court sided with American Express, repeatedly citing Evans and Schmalensee in its decision.

For more: What the American Express Supreme Court victory means for you

The concept of a two-sided market was addressed in a 2003 paper by Jean-Charles Rochet and Jean Tirole, a Nobel Prize winner in economics. They defined two-sided markets, or markets that “get both sides on board” by charging more to one set of customers to increase demand by others.

“In contrast with the buyer of a razor, who internalizes the impact of his purchase on the demand and surplus attached to razorblades, our end-users do not internalize the impact of their purchase on the other side of the market,” they wrote. (Rochet and Tirole were not available for comment.)

It is that type of market, pursued and achieved by tech companies to enlist both business partners and customers, that has prompted at least one Senate bill to rein in Google and Apple’s platforms.

The Open App Markets Act — co-authored by Sens. Richard Blumenthal, D-Conn., Marsha Blackburn, R-Tenn., and Amy Klobuchar, D-Minn. — would establish rules to protect competition and strengthen consumer protection in the app market currently dominated by Google and Apple. Under the bill, Apple and Google would no longer be able to require developers to exclusively use their app payment systems nor would the two companies be allowed to favorably price and rank their apps against competing brands. Developers would be allowed to sue for injunctive relief.

“Apple and Google are trying to prevent consumers and developers from using a third-party payment approach. They consider it a threat to them in their anticompetitive, very monopolistic approach,” Blackburn told MarketWatch.

She said Klobuchar, who as chairwoman of the Subcommittee on Competition Policy, Antitrust, and Consumer Rights, is a vital figure in any tech regulation conversation, “came to us to participate. She thinks the bill is a big step for a competitive virtual space.” Blackburn expects more co-sponsors of the bill, both Republicans and Democrats, when the Senate reconvenes in September.

Read: Bill takes aim at Apple and Google app-store tactics, senator calls it ‘craven textbook abuse’ that harms consumers

When presented with Apple’s argument that it has spent billions of dollars to make the App Store safe and secure for consumers, thus justifying its commission fees, Blumenthal bluntly told MarketWatch, “Please, shed me crocodile tears for Apple. The gatekeepers are charging a toll.”

“The legislation is crucial as smartphones have become central to our digital ecosystem, and apps are increasingly the primary mode for consumers to access online services,” said Sumit Sharma, senior researcher of technology competition at Consumer Reports.

Tech companies have maintained they adhered to the law when creating their platforms, a claim supported by public policy experts who insist the industry did not pursue monopolization but market power.

“Big Tech was not Machiavellian,” but simply conforming to the policy environment created and facilitated by legislators and regulator, Matt Stoller, research director of the American Economic Liberty Project, told MarketWatch. “It wasn’t about monopolization on [tech’s] part. Instead of building on the success of their products with innovation, they took the easy path by charging developers more on their platforms and refusing third-party payment systems.”

If tech is to adapt, Syed and others agree, it must be through new laws. However, the road to legislation in the U.S. is a few years behind those in Europe and Asia.

“In Europe, what is clear is that regulators punish abuse of a monopoly position. To steal a Spider-Man line, ‘With great power, comes great responsibility,’” author Knee said. “In the U.S., it is not illegal to be a monopoly by fair means — but not by underhanded means.”

“The same dangers that investors will face — it’s only a platform — regulators and consumers want to regulate the hell out of it without making distinctions,” Knee said. “Public policy can lead to difficult consequences for Big Tech.”

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