Regulation should not constrain tech innovation, but share it more widely and increase competition

In 2003, the (then) Competition Commission laid down its landmark ruling on the offers made for Safeway by Tesco, Sainsbury’s, Asda and Morrisons. Only the latter was, of course, allowed to proceed. In doing so not only was the shape of the grocery retail market set for the following two decades but the merger principles for the retail sector were defined in terms of the now-familiar catchment areas, drive times, fascia choice, and issues of buyer and supplier power.

Recent outcomes still follow similar principles, albeit with questions as to whether the online channel forms a separate market (JD Sports / Footasylum, no: Sainsbury’s / Asda, surprisingly, yes). But the assumptions continue of high barriers to entry, constrained local choice, and what Adam Smith called the “mean rapacity and monopolising spirit of merchants”.

And yet the growing areas of concentration are no longer apparent to the consumer comparing the fascias in her local neighbourhood.

Google holds nearly 90% of search in the UK (although arguably for shopping search, this should be defined as a duopoly with Amazon).?Google and Facebook together account for 80% of digital advertising – or 50% of all advertising -- that’s a cost equivalent to ￡500 per year paid by every household in the UK.

It is impossible for a retailer, large or small, to avoid the sticky tentacles of these online platforms

Each has created an ecosystem of complementary products and services which protects its primary sources of revenue. In Google’s case, these include Android and Chrome operating systems, YouTube video streaming, Gmail, web services such as navigation, and smart speakers. In Facebook’s case, these include Instagram, WhatsApp, Oculus VR and Marketplace.

It is impossible for a retailer, large or small, to avoid the sticky tentacles of these online platforms. And yet while retailers feel their rent, it’s perhaps harder to appreciate how these platforms have expanded their total addressable market. The start-up brand which could previously serve only a few afficionados in SoHo or Shoreditch can now reach a global audience. Shops are not being killed off but their role is changing (as D2C brands joke, “rent is the new customer acquisition cost.”)

Innovation should have its reward – and these large platforms are generally popular with consumers. Usually the forces of competition intervene well before the regulators. Perhaps TikTok will do the same to Facebook. And it is not clear how “break them up”, a popular theme among some US politicians, would benefit users who value these platforms’ seamless ease and integrated services.

And yet we do see increasing evidence that these parts of the retail value chain are tipping towards market power, not least in their pricing and profitability. Questions are also being raised about privacy and the ownership of data – although most of the proposed solutions run directly contrary to competition objectives, as has already been seen with GDPR. That might explain why Apple thinks it’s a good idea to keep all your behaviour ‘private’ on their device.

The regulation of online giants presents one of the most important but complex policy challenges of our time. The CMA has recognised the issue and now, post Brexit, has more power to address it, but still struggles with the remedy.

More attention is likely to be paid to acquisitions. Between 2008 and 2018, of the 500 acquisitions made globally by the 5 largest digital firms, none was blocked by competition authorities.

One intriguing solution may lie in forcing tech giants to open up data

But more than that, the traditional competition toolkit needs updating. Rent-seeking, bundling, market foreclosure and self-dealing should be scrutinised.

One intriguing solution may lie in forcing tech giants to open up data, as has been done to an extent in retail banking. Allowing consumers to port their data would allow them to move more easily across competing ecosystems.

Another lies in pushing platforms to accommodate competitors’ services such as links, in-app sales and payment solutions. Chinese government intervention has been moving in this direction, while the recent US court decision on Epic vs Apple follows similar lines.

The objective should not be to constrain tech innovation, but to share it more widely across firms and users, and in so doing to increase competition. And then platform profitability might return from the stratospheric to the merely normal. Otherwise competition authorities will be fretting over the continued consolidation of a weakening traditional retail industry while a few global superpower firms accumulate power and profit.

This article appeared in Retail Week, 28 September 2021