DSM Watch: European Commission working document identifies characteristics of online platforms
On 25 May 2016, the European Commission published a “Commission Staff Working Document” together with its “Communication on Online Platforms and the Digital Single Market: Opportunities and Challenges for Europe ” (see here our previous post on this Communication).
The starting point of the Staff Working Document is that online platforms cover a wide range of activities, but share several common features:
(i) the capacity to facilitate and extract value from direct interactions or transactions between users;
(ii) the ability to collect, use and process personal and non-personal data in order to optimise, inter alia, the service and experience of each user;
(iii) the capacity to build networks where any additional user will enhance the experience of all existing users;
(iv) the ability to create and shape new markets into more efficient arrangements that bring benefits to users but may also disrupt traditional ones; and
(v) the reliance on information technology as the means to achieve all of the above.
The Staff Working Document distinguishes five different business models of online platforms, which we summarise below.
- Marketplaces and e-commerce platforms
Online marketplaces provide a single platform on which transactions between sellers and buyers of goods and/or services are facilitated thanks to reduced transaction costs and the presence of multiple sellers in one place. In addition, online marketplaces offer recommendation and suggestion functionalities for customers as well as secured payment methods and trust-increasing instruments (e.g. peer reviews, identity checks). They also set up and implement rules and codes of conduct governing the marketplace.
Marketplaces generate a significant amount of traffic and online sales and contribute to change entire retail sectors such as media (books, movies, and music) or tourism. This also explains why they have become a target for the distribution of counterfeit goods. As a result, major platforms have set up policies to self-regulate their own marketplaces.
Online marketplaces rely on personal and non-personal data in order to optimise the shopping experience. They may also use collected data to understand market trends.
Marketplaces can generate revenues in many ways, principally through fees charged on third-party sales (e.g. a percentage of the total sale price) but also through the sale of online advertising space.
2. Mobile ecosystems and apps distribution platforms
Mobile services are becoming the dominant revenue source for online service providers. This led to the development of important marketplaces for software and digital content. Applications (“apps”) for smartphones and tablets have played an important role in the shift in users’ online activities from personal computers to smartphones.
Ecosystems such as Android and iOS have managed to attract a large number of users, advertisers and app developers. The app stores running on iOS and Android allow users to download apps and content, facilitate their payments, collect their feedback and reduce their search costs. They also provide a centralised and simplified monetisation mechanism for developers.
Apps stores will play a key role in the future with the rise of the “internet of things”, wearable tech, in-car systems etc.
3. Internet search engines
Internet search engines are services that help users to find the relevant answers to their search requests from among billions of web pages on the Internet. They facilitate interaction between users searching for information, websites seeking an audience and advertisers looking for potential customers.
Most general search engines typically operate in three steps: crawling, indexing and serving results. Many factors play a role in determining the ranking of the information, meaning the order in which the results are displayed by the search engine.
As search engines give visibility to websites on the Internet, online operators are encouraged to improve their website’s quality and structure by applying search engine optimization (“SEO”) techniques.
Nowadays, most general search engines are free and earn money through advertising. They offer advertisers tools for reaching potential customers and controlling the parameters of their advertising campaign, allowing them to target their advertisements with e.g. specific keywords.
Search engines also play a major role as an information intermediary and help consumers into comparing products and services.
4. Social media and content platforms
The Commission recalls the definition of social networking services that it previously gave in its decision concerning the Facebook/WhatsApp merger: “services which enable users to connect, share, communicate and express themselves online or through a mobile app” (case No. Comp/M.7217, §46). Such definition may cover both “private” and “professional” networking services.
Major companies use social media platforms (SMPs) to directly communicate with customers. SMPs also provide a new channel to acquire product/service information where consumers have the power to influence other buyers through reviews of products or services used.
SMPs may constitute authoritative sources of information and may be used to drive public opinion as they attract attention of a great number of people. In addition, SMPs are an increasingly important communications channel and allow users to exercise their right to freedom of expression. They have to frequently deal with removal requests of allegedly illegal user-generated content (e.g. hate speech, defamation etc.).
As access to SMPs is generally for free, their main revenue source derives from advertising. Revenues are also generated from allowing access to software applications in return for a commission. The resale or internal re-use of user data can be another important source of value for SMPs which also perform market-research function for advertisers by providing information about consumer preferences.
5. Online advertising platforms
Every platform, blog, website etc. can be used for advertising. This wide range of options makes it difficult for companies to handle online advertising campaigns. Online advertising platforms thus intervene to facilitate the interaction between publishers (i.e. the websites where ads are published) and advertisers.
Online advertising platforms help advertisers in reducing advertising wastage. They offer an efficient mechanism for delivering ads to a selected audience and collecting information about users in order to improve the targeting of ads. Platforms also allow publishers to monetise their content efficiently.
Collection of personal data is also very significant. Cookies installed in users’ browsers to record the user’s webpage visits serve as a basis for targeting advertising. Third-party data marketplace activities have also grown in the recent years.
The Commission identifies several types of online advertising platforms: (i) supply-side platforms provide publishers with the tools needed to sell their advertising space via a single interface to multiple advertisers; (ii) demand-side platforms offer a single interface to advertisers to manage their advertising campaigns across multiple publishers; (iii) data-management platforms collect user data from multiple sources and are used by advertisers to improve the targeting of their campaign; (iv) ad networks are two-sided platforms serving publishers that want to host advertisements and advertisers that want to run ads on those websites and; (v) ad exchanges marketplaces facilitate auction-based direct transactions between publishers of online advertising space and buyers.
To conclude, this Staff Working Document shows the thorough analysis led by the Commission to better understand what online platforms are in all their diversity. Far from only listing a few well-known names of giant websites, the Commission’s document stresses the increasing role of online platforms in the digital economy, their diversity and the need to promote their innovation in Europe, as well as some of the challenges they may face.
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