Many firms have come to rely on digital platforms like Apple, Google, Amazon and Alibaba for ease of transaction and market access. But they may pay a high price in the form of lost strategic autonomy. Andreas P J Schotter and David Diwei Lv identify tactics that powerful platforms deploy to reinforce dependence and discuss the implications for innovation and competition policy.

Digital platforms like Apple, Google, Amazon and Alibaba have become ubiquitous, facilitating transactions and generating vast ecosystems of value creation. However, their growing dominance raises concerns about anti-competitive behaviour. Our research uncovers how powerful platforms influence and constrain digital firms’ strategic aspirations and decision-making in their ecosystems. This influence is now drawing increased scrutiny from regulators worldwide.

A Faustian bargain

Firms that increasingly depend on large digital platforms for their core business activities face a “Faustian bargain” when joining major digital platforms. They gain access to large user bases and sophisticated technologies, but surrender control over their strategic autonomy. We found that powerful platforms one-sidedly shape the strategic aspirations of the dependent firms through three key mechanisms:

• Scale and network effects, a characteristic of powerful platforms, create market dependence as firms rely on the platform’s massive user base.
• Platform control over technological infrastructure leads to technological dependence.
• Sophisticated and rare platform features cause structural dependence through high switching costs.

This multi-layered dependence allows powerful platforms to exert outsized influence on digital firms’ aspirations, strategies and revenue, even without directly entering their markets. For instance, a smart home device maker like iRobot must constantly update its products to maintain compatibility with Apple’s iOS, diverting resources from core innovation to platform compliance.

The European Union’s recent probe into Apple’s app store practices highlights the real-world implications of this power dynamic. Launched in late June 2024, the investigation focuses on whether Apple’s rules for app developers violate EU antitrust laws by limiting choice and innovation. This action follows complaints from music streaming services and e-book distributors about Apple’s requirement that they use its in-app purchase system, which takes a 30 per cent commission on sales.

How platforms constrain autonomy

Our research identified several tactics powerful platforms deploy to reinforce dependence. Weak backward compatibility and mandatory updates force firms to continually adapt to platform changes. Ecosystem exclusiveness prevents cross-platform compatibility, locking firms into a single ecosystem. Strict control over scalability exploitation through APIs limits firms’ growth potential.

These mechanisms shift digital firms’ focus from autonomous goal setting to reactive adaptation to platform demands. The case of Epic Games’ dispute with Apple over in-app payment systems illustrates this dynamic. When Epic attempted to bypass Apple’s payment system to avoid the 30 per cent commission, Apple promptly removed Fortnite from the app store, demonstrating its power to control access to its vast user base.

The EU’s investigation into Apple’s practices is part of a broader trend of increased regulatory scrutiny. In 2023, the EU implemented the Digital Markets Act (DMA) to ensure fair competition in digital markets. The DMA designates large platforms as “gatekeepers” and imposes obligations on them, such as allowing third-party apps to inter-operate with the platform’s services and prohibiting self-preferencing practices.

Platform internationalisation

Digital platforms also face unique challenges as they expand globally. Our research shows that their ability to gain legitimacy varies across institutional contexts. In countries with incomplete institutions, platforms can leverage their capabilities to address societal challenges and shape regulations. Highly institutionalised countries may view foreign platforms with more scepticism. Countries with “captured” institutions pose the greatest barriers, as incumbent firms resist disruption.

Uber’s experiences in different markets illustrate these variations. In Egypt, where institutions were less developed, the company successfully transformed the institutional environment by addressing transportation and employment challenges. In contrast, it faced significant regulatory hurdles in more institutionalised markets like London and parts of continental Europe.

Platforms maximise legitimacy by strategically sequencing their international expansion – first transforming institutions in countries with incomplete frameworks, before tackling more challenging environments. This approach allows platform firms to build a track record of positive societal impact, which can help mitigate concerns and symbolise responsible expansion in more sceptical markets.

However, this strategy also raises questions about the global implications of platform power. As platforms shape institutions in less regulated markets, they may export their business models and associated power dynamics. This could lead to digital colonialism, where powerful platforms from developed economies dominate digital ecosystems in developing countries.

Policy implications

Current antitrust regulations struggle to address platform influence, as they don’t directly participate in digital firms’ markets. Traditional metrics like market share fail to capture the full extent of platform power. We argue that new policy approaches are needed to address these challenges.

First, regulators must look beyond market share metrics to assess platform power. The EU’s approach under the DMA, which considers factors like user numbers and market capitalisation, offers a potential model. In addition, policymakers should consider the indirect effects on innovation and competition across the ecosystem.

The EU investigation into Apple’s practices recognises this by examining how app store rules affect developers’ ability to compete and innovate. Additionally, mandating greater interoperability and transparency in platform governance could help level the playing field. The DMA’s requirements for gatekeepers to allow third-party interoperability and provide transparency in advertising services are steps in this direction. Finally, establishing expert agencies to investigate digital markets and mediate disputes could help address the complex technical difficulties involved in platform regulations.

Similar discussions are underway in the United States. The American Innovation and Choice Online Act, introduced in 2022, aims to prohibit dominant platforms from favouring their own products or services. While the bill has not yet passed, it reflects growing bipartisan concern about platform power.

The role of international cooperation

As digital platforms operate across borders, effective regulation requires international cooperation. The EU-US Trade and Technology Council, established in 2021, represents an attempt at transatlantic coordination on tech regulation. However, significant differences in approach remain, with the EU generally taking a more interventionist stance than the US.

In Asia, countries like China have taken a different approach, fostering domestic champions like Alibaba and Tencent while regulating the entry and operations of foreign platforms. This has created a fragmented global landscape, with different platform ecosystems dominating in different regions. As tensions between China and Western countries grow, this fragmentation could deepen, potentially leading to a “splinternet” with divergent rules and standards.

Conclusion

As digital platforms continue to grow in economic importance, policymakers and business leaders must grapple with their complex effects on innovation, competition, and firm autonomy. Our research highlights the need for nuanced approaches that can harness the benefits of platforms while mitigating their potential to constrain the aspirations and strategic choices of other firms.

The EU’s investigation into Apple’s practices and the implementation of the DMA represent significant steps towards addressing these challenges. However, the global nature of digital platforms means that unilateral action by any single jurisdiction is unlikely to be sufficient. Effective regulation will require a delicate balance between fostering innovation, protecting competition, and ensuring consistency across different regulatory regimes.

Navigating this complex landscape will require careful strategic planning by digital firms operating on these platforms. Firms must weigh the benefits of platform access against the potential loss of strategic autonomy. Diversifying across multiple platforms, where possible, and actively engaging in policy discussions may help mitigate risks, but may prove too costly. There might be no choice but to surrender, particularly for young resource-constrained firms.

Ultimately, like in any Faustian bargain, the devil is in the details; finding the right balance between platform power and ecosystem vitality will ensure a vibrant and competitive digital economy.

• This blog post is based on The Dark Side of Powerful Platform Owners: Aspiration Adaptations of Digital Firms, Academy of Management Perspectives and first appeared at LSE Business Review.
• Featured image provided by Shutterstock
• Please read our comments policy before commenting 
• Note: The post gives the views of its author, not of USAPP– American Politics and Policy, nor of the London School of Economics.
• Shortened URL for this post: https://wp.me/p3I2YF-e5C