When considering the visionaries of the Fourth Industrial Revolution, giants such as Amazon, Google, Apple, and Alibaba have emerged as leaders in technological innovation. Known in every corner of the world, these powerful platforms continuously transform the digital landscape and how we conduct modern business. Perhaps no one understands this better than burgeoning digital products and service firms, which are reliant on platforms to conduct their business. Powerful platforms offer unparalleled opportunities for emerging digital enterprises to expand rapidly, innovate, and succeed on a scale almost impossible otherwise.
However, beneath this remarkable potential, a darker reality casts its shadow.
In an illuminating new study, Ivey Professor of General Management & International Business, Andreas Schotter EMBA ’04, PhD ’09, and co-author David Diwei Lv of The Hong Kong Polytechnic University have revealed a dark side at the heart of powerful platforms. While these platforms present unrivaled opportunities, they also frequently stifle the aspirations and strategic autonomy of the firms that rely on them.
“These platforms provide access to vast user bases and sophisticated technologies that can catapult a small startup to global prominence almost overnight," explains Schotter. "But our research shows that this access comes at a price”
How, then, have these powerful platforms climbed to such commanding heights, controlling numerous tech firms and stifling innovation? More critically, what steps – if any – can be taken to curb the heavy-handed influence of today's giants?
The grip of giants
It's hard to believe, but powerful platforms once served merely as strategic tools for digital firms aiming to broaden their reach efficiently. Yet, with the rapid expansion of the digital marketplace, these platforms have evolved from optional strategies to essential lifelines—creating a one-sided dependency. With no sign of this dependency easing, Schotter and Lv have identified three ways powerful platforms influence and maintain control over platform dependent firms’ strategic aspirations:
- Market dependence: Major platforms' near-monopoly status, sheer scale, and network effects make them indispensable for reaching customers. This means digital firms seeking to connect with a large, legitimate user base have limited alternatives available;
- Technological dependence: To maintain access, firms must conform to the specific platform's infrastructure and standards, often sacrificing specific features and capabilities to comply with the platform's evolving rules and regulations; and,
- Structural dependence: Unique platform technical features and high switching costs create lock-in effects for dependent firms. Despite potentially better alternatives, the expenses associated with switching or even engaging on other platforms simultaneously are often cost-prohibitive for digital firms.
The relentless hamster wheel
Schotter’s complex dependency model illuminates the significant influence powerful platforms wield over dependent firms. And, while the immediate effects of this dependency are clear, the long-term implications particularly alarm Schotter.
In their bid to engage with powerful platforms, Schotter argues firms often fall into a vicious cycle of reactive adaptation, diverting their focus from proactive innovation.
"Instead of pursuing their own vision, they are constantly adjusting to platform changes and requirements,” he said. “It’s a Faustian bargain[1], where these companies give up strategic autonomy for short-term access to the vast user base of the powerful platform."
Several compelling cases bring this matter to the forefront. Smart home manufacturers like iRobot have to frequently update their products’ software to keep pace with iOS or Android systems, diverting resources away from core innovation. And the high-profile clash between Epic Games and Apple over in-app payments vividly illustrates how platforms can control access to crucial markets.
These dynamics are not just theoretical concerns. Regulatory actions, such as the European Union's recent investigation into Apple's App Store practices, underscore the real-world implications of platform power. The probe focuses on whether Apple's rules for app developers unfairly limit choice and innovation and falls on the heels of complaints about mandatory use of Apple's in-app purchase system and its 30-per-cent commission fee.
Maintaining the grip of influence
Regardless of size and status, maintaining market dominance is challenging. To "defend the throne," powerful platforms deploy various strategies to ensure digital firms remain dependent on them – furthering their dark paradox. Schotter and Lv highlight several tactics platforms use to reinforce reliance:
- Weak backward compatibility (the ability to support older versions of software, hardware, or otherwise) and mandatory updates force firms to continually adapt to platform changes;
- Ecosystem exclusiveness prevents cross-platform compatibility, locking firms into a single ecosystem; and,
- Strict control over scalability exploitation through Application Programming Interfaces (APIs) limits firms' growth potential.
These mechanisms further shift digital firms' focus from autonomous goal-setting to reactive adaptation to platform demands.
Adapting antitrust for today's market realities
As people become increasingly aware of the issues, regulators globally are scrambling to ensure fair competition in digital markets. After all, how have we allowed a handful of companies to nearly monopolize entire industries? While the European Union's Digital Markets Act demonstrates a move toward more robust oversight, it’s evident existing antitrust frameworks require modernization.
"Current antitrust frameworks, which often focus on traditional metrics like market share, aren't well-suited to address the nuanced power dynamics in platform ecosystems," said Schotter. "We need new approaches that consider factors like data control, network effects, and the indirect influence platforms exert on innovation and competition. The devil is in the details, though. These measures need to be sensitive not to limit the platforms’ network effects, a major feature that makes them so attractive and effective."
The researcher suggests several potential policy directions, including:
- Mandating interoperability between platforms;
- Enhancing transparency in platform governance; and,
- Establishing specialized regulatory bodies with technical expertise in digital markets – including international cooperation
Similar discussions are underway in the United States. The American Innovation and Choice Online Act, introduced initially in 2022, aims to prohibit dominant platforms from favoring their own products or services. While not yet passed, the bill reflects growing bipartisan concern about platform power.
Navigating the paradox
While Schotter is hopeful for policy changes, he recommends businesses operating within platform ecosystems adopt strategic foresight.
"Firms must carefully weigh the benefits of platform access against the potential loss of strategic autonomy," he said. "Where possible, diversifying across multiple platforms and actively engaging in policy discussions can help mitigate risks."
But Schotter acknowledges companies are unlikely to become completely independent from individual major platforms, especially not smaller or resource-constrained ones. Developing alternative solutions or operating across multiple platforms is expensive, particularly for startups and small businesses.
Will today’s giants still reign tomorrow?
As we traverse the uncertain terrain of the modern digital marketplace, the future dominance of today's powerful platforms is unclear. Will they maintain their grip, or will fresh legislation and shifting market dynamics disrupt their reign? Addressing this platform paradox requires a delicate balance – spurring innovation while safeguarding competition and maintaining regulatory consistency. The big question remains: Will these strategies be effectively implemented, or will the giants continue to dominate? The devil lies in the detail.
Want to dive deeper into the dark side of powerful platforms? View the full details of Schotter and Lv’s study: “The Dark Side of Powerful Platform Owners: Aspiration Adaptations of Digital Firms,” in the June 2024 Academy of Management Perspectives.
[1] A deal with the Devil (also called a pact with the Devil) is a cultural motif exemplified by the legend of Faust and the figure of Mephistopheles. According to traditional belief, the pact is between a person and the Devil or another demon, trading a soul for diabolical favors, which vary by the tale but tend to include youth, knowledge, wealth, fame, and power.
