The formerly sleepy world of regulation has just become the hot new thing. Rules are being drawn up now that will fundamentally reshape the prospects of individual firms, sprawling ecosystems, and even entire nations. In this brave new world, the risks and opportunities of regulation have become a key driver of pretty much any business strategy. From e-commerce and energy production to selling experiences, financial services, and crypto payments, much hangs on what regulators will mandate, allow, or encourage in big tech. And if investors and businesses aspire to identify the future winners and losers, their first concern should be understanding, and potentially helping shape, the rules of the game.
Admittedly, regulation has always been an important strategic driver for telecommunications, public-sector contractors, and (especially after the global financial crisis) banking. But for most other businesses, regulation was just red tape—a drag on profitability that had to be overcome. This is changing radically: as traditional boundaries vanish and digitization shifts consumption from products to experience-based bundles, platforms and the ecosystems they support rule the day, and with them comes a new type of power. As orchestrators of sector-spanning ecosystems drive the economy, regulators are revisiting their playbook, and more change is afoot. The rising regulatory backlash against big tech should be of concern to all companies.
Why are regulators pushing back so hard? It’s because the tech firms’ nodal network positions, and their ownership of data, have allowed them to make their customer relationships both deeper and broader. Ultimately, they can make themselves into a one-stop shop, orchestrating ecosystems that include other, co-specializing firms (called complementors) in order to meet customers’ needs in a whole range of areas. Think Apple and its App Store, Amazon and its Marketplace, Google and its dominance in online advertising. This has prompted one of the most important changes in the regulatory landscape in well over a generation, especially in the field of competition law, with scholars asking whether antitrust law is truly “fit for purpose.”
Regulation game changers
Regulation in many areas—antitrust, tech, data, AI—will be a game-changer for companies, including those far beyond big tech that engage with platforms, in four distinct ways: it will determine where technology companies focus to get maximum profit, how competition is viewed across industries, how privacy (and potentially entry and scalability) work, and, finally, how companies create economies of scope, in which being active in one market provides benefits in others. Each of these factors affects the business of deciding strategy, specifically: where and how to play.
Determining profits: Regulations will determine where big tech goes next in search of profit, deciding not just how the pie is sliced up, but also how big it is in the first place. As we shift toward interconnected solutions, many cool new opportunities depend on a clear set of shared standards. Consider mobility, where four-letter firms (Uber, Lyft, Grab, and Beat) are doing their level best to broaden their reach, striving to shift from ride-hailing to becoming super-apps that cover anything from food delivery to financial services. Regulators will be watching to see if they will do so in a legally acceptable manner and not engage in any abusive practices should they become dominant in the market.
The rising regulatory backlash against big tech and its ecosystems should be of concern to all companies.
The same goes for autonomous driving and last-mile solutions, areas where the platform owners have improvised their own rules, resulting in fragmented, mutually incompatible ecosystems. For example, in Germany, the adoption of electric cars has been slowed down by the proliferation of diverse charging networks. For the cars themselves, manufacturers are arguing that they should be free to gather the data generated by the vehicles’ computer systems, as part of the “extended car” concept. If regulators agree, carmakers will be able to selectively share this data with interested business users. If that gambit fails, they may be forced to share that data in real time with competing providers of after-sales or complementary services (such as insurance companies and independent repair shops). Regulators’ decision on the matter will determine whether carmakers are in a position to control what kind of third-party services are offered or if it will be left to the market. This in turn will determine whether the market will take off—and how large it will be.
At the same time, carmakers are fighting a rearguard action against big tech. Apple CarPlay and Google Android Auto are lobbying regulators for access to cars’ systems so the companies can follow their customers when they hit the road. The outcome of the battle doesn’t just matter for carmakers and big tech; it affects all firms that want a slice of the automotive pie.
Competition norms: Regulation is proving pivotal in conflicts created when traditional firms compete with or participate in ecosystems dominated by big tech. How many of the profit opportunities created by new regulation will be gobbled up by big tech, and how much of that profit can be internalized by their partners? For instance, regulators are asking, Is it appropriate for a dominant ecosystem orchestrator like Apple to forbid content providers from accessing customers and demanding payments directly? And, given the modest effort Apple put into setting up its App Store, is its 30% cut from every app sold there a fair practice or a blatant abuse of dominant position? Epic Games’ recent lawsuit against Apple (which centered around how people pay for the Fortnite game) sailed bravely into these unchartered waters; the judge ultimately ordered Apple to reverse some, if not all, of its practices.
Regulations will determine where big tech goes next in search of profit, how the pie is sliced up, and also how big it is in the first place.
Consider also the drama currently playing out in digital advertising. Big tech firms, supported by their ecosystem partners, have helped spawn a successful industry focused on understanding the profile of individual customers and offering them tailored advertising. Now, however, society at large is waking up to just how much data is being collected, raising the threat of regulatory intervention.
Likely mindful of that threat, Apple has changed its operating system to prompt its customers to block the use of their information—all in the name of privacy. However, its true motives have been hotly debated, since this move cements Apple’s own role as controller of that data and pushes out rivals.
Taken together, these purportedly customer-centric trends could spell oblivion for digital advertisers and pose significant challenges for (often smaller) firms—from cupcake bakers to ball-bearing makers—that use such customized campaigns to acquire customers. So, while customers ostensibly gain some control, they may yet lose some choice—and their interests may be all the more liable to be overtaken by opportunistic tech firms.
Privacy, entry, and scalability: The rules around data access and privacy will determine how easy it is to compete in a new market segment and whether an “installed” customer base gives an inherent advantage. The dynamics of competition, as understood by the regulator, will either constrain participants or open up markets. For instance, in the payments sector, the EU has introduced a robust set of regulations called Payment Service Directive2 (PSD2). PSD2 creates a contestable marketplace, mandating that banks and other financial institutions open up, which has unleashed competition from, and innovation opportunities for, smaller players. This is leading to an increase in new banking options for customers, lower fees for EU payments, fewer opportunities for EU banks to lock their customers in, and greater speed of innovation.
The current discussions within the US Federal Trade Commission (FTC) and in the EU on tech interoperability aim to facilitate such innovation, reduce the inherent benefits of large players, and set the rules of the game. While those rules might not be sufficient to fend off the dominance of a few large players, they’ll change the landscape for all involved.
In a world of digitized service provision, where traditional sectoral boundaries fade away, all bets are off. Choices that might look like simple ways to protect privacy or customer convenience can have profound implications for business-model design and success, and can determine whether an ecosystem orchestrator will have an insurmountable advantage, and who will be able to innovate. These are all areas where companies need to keep abreast of where the regulatory chips are likely to fall as those companies future-proof their business models. The fact that your fridge can tell you when you’re out of milk and then order you some more is handy for you—but it also raises questions over who will sell the milk, what sorts of companies will be involved, how their ecosystem will operate, and who gets to keep the spoils. Regulation will shape all these interactions.
Economies of scope: Companies are reshaping their profiles by being active in one market in order to provide a benefit in others, and regulation will determine how successful they’ll be. In Russia, Sberbank changed its name to Sber, after a buying spree, so as not to be immediately identified as a bank, yet this strategy could be open to a challenge from the Russian Antimonopoly Commission. Chinese giant AntGroup, itself spun out of the Alibaba ecosystem, has been challenged by Chinese regulators, who are pushing it to unbundle, potentially obliterating its economies of scope. In the US, there is even talk of a big tech breakup. Although this is unlikely, rules drive economies of scope. Many types of regulators will be involved in determining what can be done with consumer data and how the link to the customer can be handled, and those decisions, in turn, will determine what business models will succeed.
What we call “regulation” in the 2020s is very different from regulation in the 1920s, when large firms were about to face a slew of rules to curb the power of financiers. Today, regulators are considering platform power for the first time. They’re grappling with the thorny questions of what business models firms use, how those firms wield power, and how they make money. As businesses change, industry boundaries dissolve, and technology opens up new opportunities and new forms of corporate power. Regulation is reinventing itself; specifically, it is becoming more strategic—and more encompassing, shaping where opportunity lies and how firms compete.
In 2019, the US, the UK, and the EU all saw the publication of major studies on digital competition. For example, the UK provided guidelines for its new Digital Competition Unit. We have also seen regulatory action in Australia, China, Hong Kong, and Korea. In October 2021, the British government announced an investigation into whether music streaming service Spotify’s dominance of the market was unfair to songwriters and performers. That same month, the US Senate published its own scathing report on big tech, and both houses of Congress are debating new legislation on a variety of antitrust measures. Several US states also filed anti-monopoly lawsuits against Google, and the US FTC filed an antitrust action against Facebook. Meanwhile, the EU forged ahead with its Digital Services Act and the Digital Market Act, which expand the regulations that govern the relationship between platforms and the businesses that use them. Nation states are engaged in a contest of coming up with new antitrust ideas. It is not certain that these moves will curb corporate concentration, but they will likely change the legal landscape.
Beyond antitrust regulators, standard-setters are also helping shape the context. In healthcare, the success of major firms like Philips and Siemens Healthineers in the medical imaging market will be driven by regulatory convergence, which will facilitate the development of co-specialized services, such as cloud-based databases of patient information, that will drive the demand for digital healthcare. Unicorns such as London-based Babylon, a digital health platform that works with providers including the National Health Service in the UK, will see their fate determined by what regulators encourage or not. Gaia-X, the EU body that aims to provide a common set of principles and attributes for EU B2B ecosystems, is not a regulatory body, but it still shapes the standards of diverse actors that collaborate to create value—such as the automotive and infrastructure firms needed to support autonomous and smart driving. This will determine how the market develops and who gets to play.
AI and geopolitics
As AI becomes ever more important, it too will become a regulatory battlefield. Customers and citizens (in the West, if not in China) are demanding clearer rules and regulations on how automated decisions are made, what is allowed, and what is ruled out. Also, as the AI ecosystem itself is becoming a force to reckon with, and as AI increases the disparities between digital pioneers and traditional players, there is a call for regulators to play a much larger part. In the next few months, expect regulation on AI to focus not only on compliance but also on the extent to which firms can leverage the pool of information they generate to learn from and respond to their customers. These regulations are likely to be regional, showcasing the rivalry between the key trading blocs, each of which is putting together its business framework in a different way.
Finally, in this new context, geopolitics is starting to have a radical impact on business success and the choice consumers ultimately get. It is no accident that regulation against big tech players was pioneered in Europe, which is not home to any such player. Similarly, the battle between former US president Trump and Huawei on the grounds of security was motivated by the lack of US competition in this area and the need to encourage it. Such tech wars have become more overtly political of late, with the technological rivalry between the US and China setting the stage. The creation of the US-EU Trade and Technology Council this fall, a US attempt to recruit the EU into fending off Chinese technology, is one result. The ultimate impact will be threefold: prices will rise for businesses and end customers; the geographic location of suppliers will come under greater scrutiny; and new ecosystems will emerge, such as Huawei’s Harmony OS for smart devices, which was the inescapable result of Huawei’s exclusion from Google’s Android system. Harmony OS now has 120 million users.
Brave new world
Digitization and the crumbling of traditional regulatory barriers have unleashed a creative rethinking of how business can be structured. Digitization has offered an unprecedented set of new opportunities, but also increased the potential for corporate power concentration. This has created pushback, and today, regulation has returned with a vengeance. Although it might not be able to reduce corporate power, it will surely change how most firms compete, and how they make money. Ignore these changes at your peril.