Digital economy – Is it a two-horse race?

The great digital divide is not between developed and developing countries. Many developed countries are also far behind in the digital race. The global digital economy seems to be concentrated in just two countries—one developed and the other, still developing.

It may seem outrageous but the US and China account for about 90 percent of the market value of the world’s 70 largest digital platforms and they own around 75 percent of all patents related to blockchain technologies. They are also responsible for approximately 50 percent of global spending on the Internet of Things (IoT) and dominate 75 percent of the cloud computing market.

Google accounts for about 90 percent of the global market share of online search, while Facebook accounts for an estimated 66 percent of the global share of social media users. Amazon has laid claim to around a 40 percent share of the world’s online retail activity and its Amazon Web Services account for a similar share of the global cloud infrastructure services market. In China, Tencent’s WeChat and Alibaba’s Alipay have captured the entire Chinese market for mobile payments. Meanwhile, Alibaba is estimated to have captured about 60 percent of the Chinese e-commerce market. Many e-commerce players in Asia have either the US or Chinese e-commerce players as key investors.

Amber lights are blinking on the dashboard of the global economy once again. The fight for dominance by a few digital behemoths has far-reaching consequences, in ways that were not thought of before.

At present, big tech companies are the subject of several investigations to see if they use their large data trove to take unfair advantage of competitors. Smaller rivals and traditional incumbents are not privy to this customer data. For example, a search engine company has been accused of favouring its own services over those of rivals. There are concerns over whether a few companies unfairly wield power over their application stores hurting rival apps from competitors. Some e-commerce players use their data algorithms to favour their own private-label goods over products from third-party sellers.

Big tech companies often pursue acquisitions to eliminate the threat from smaller rivals. For example, Facebook acquired rival Instagram in 2012, followed by WhatsApp in 2014. But how can market efficiencies be realised when many of these local start-ups are acquired at an early stage by their bigger rivals?

Regulators must walk the fine line of regulating tech companies without hurting innovation. As an example, Star Theory Games (formerly Uber Entertainment), an online game developer shut down one of its popular games due to data-privacy regulation in Europe, unable to bear the costs of rewriting the game and migrating it onto a different platform. Yet, the fight for dominance in the digital world has far-reaching consequences due to data-access, in ways that were not thought of before.

The market’s invisible hand is increasingly being managed by a handful of dominant platform-based behemoths. For example, traditional market regulation mechanisms such as marked maximum retail prices and checks and balances to prevent price-fixing and collusion, seem to be losing meaning in a digital world where prices are set in a non-transparent approach, at times by using algorithms.

Is there a single strategy to win a football game? Highly-paid club manager often evaluates the strengths and weaknesses of his team to come up with a strategy. Likewise, each nation needs to address the problem of regulating digital platforms in a different manner. To resolve the issues surrounding inefficiencies in access to data, we advocate a mix of three key approaches: a) data privacy approach, b) data localisation approach, and/or c) universal data approach.

In May 2018, the European Union (EU) introduced the General Data Protection Regulation (GDPR) to harmonise data privacy laws across its members. To date, about 120 countries have enacted data protection laws and around 40 countries and jurisdictions have pending data-protection bills or initiatives modelled after the EU’s GDPR. While helping to preserve data privacy, these regulations at times exacerbate market efficiency.

Digital behemoths possess the financial backing to hire legal experts to ensure compliance and insulate themselves against any incidental losses. In contrast, their smaller peers feel pressured to put a stop to data collection practices, even when such data is integral to their businesses for fear of noncompliance. Since GDPR was put into effect, the advertising share of a leading search engine has grown while most other adtech vendors in North America and Europe have lost ground.

Some countries such as Vietnam are attempting to fight inefficiencies through data localisation requirements and mandating digital platform companies to open local offices in the country. This led to multiple data centres being set up locally, creating many jobs and benefiting the economy. The government can also collect taxes easily with local operations in the place. Many developing countries, however, do not have the required digital infrastructure, implying a higher cost of data storage and higher security risks.

There are talks in India about mandating digital companies to sell public or non-personal data to anyone within the country seeking access to the database to level the playing field for the smaller players. This approach is similar to governments acquiring land for making highways or roads, where the owners are expected to act in national interests. However, in encouraging sharing and access, one must also not lose sight of privacy and security risks.

We customise our salad as per our preferences and food allergies. Likewise, each country is trying to pick a mix of approaches that suit its reality. India introduced the Personal Data Protection Bill (PDPB) in December 2019 and the scope of this bill is much broader than the European Union’s GDPR. For instance, the territorial scope is not limited to organisations which are not only residing in India but also applicable to organizations outside the country who are processing data in connection with India. The PDPB also allows the government broad authority to seek the disclosure of public data.

To exercise greater sovereign control over the country’s data, India has also adopted data localisation mandates. This began in April 2018 when the Reserve Bank of India (RBI) issued a directive to all companies to store data related to payment systems (financial data) in India. Since then, there have been eight sectoral notifications regarding data-localisation depending on the nature of the sensitivity of the data. When it comes to universal access to data, India is a pioneering country in this regard although a lot of details need to be worked about in this regard.

However, we like to remind our readers that the digital behemoths have the financial muscle to lobby for favorable regulations. Hence, in order to push for the right moves, many developing nations including India will need the backing of Europe, Japan, regional bodies and multilateral organisations. Otherwise, the lobbying power of large digital platforms may simply prove too much.