Regulating Over-the-Top Service Providers in Two-Sided Content Markets: Insights from the Economic Literature
13 Pages Posted: 1 Apr 2015 Last revised: 15 Aug 2015
Date Written: March 31, 2015
The market for telecommunications services is changing rapidly and a myriad of new players is successfully deploying new and innovative services, which are adopted by the consumers. Especially emerging “Over-the-Top Services” (OTTs), which generally do not own an extensive infrastructure, but rather use the existing infrastructure of Internet Service Providers, lead to the necessity of investments into transmission capacity due to increased bandwidth-consumption (e.g. Netflix or YouTube) and are forcing traditional telecommunications providers (telcos) to reconsider their business models as a consequence of the offered, partly substitutive services of (e.g.) Google, Skype, WhatsApp or Facebook.
Hence, telcos claim to be exposed to declining revenues while simultaneously forced to invest into new high-capacitive infrastructure. The debate about the monetary compensation needed is partially covered by the net neutrality debate. A host of academic literature has recently looked at this discussion (cf. Krämer, Wiewiorra and Weinhardt, 2013) and considered different scenarios, welfare implications and resulting (new) revenue streams for telcos. Although this debate is still ongoing and telcos refer to the necessity of additional revenues to stem the needed investments (cf. ETNO, 2012), it seems unclear if the conclusion to this debate solves the disputes between traditional telcos and OTTs.
OTTs offer complementary services to the underlying infrastructure (Peitz, Valletti and Schweitzer, 2014) and might be a precondition for a high valuation of the consumer – but as they extract traditional revenue streams of telcos, they are also a threat. The most salient issue is whether OTT providers should and can be regulated similarly to the infrastructure service providers. Infrastructure service providers are subject to several regulatory remedies, such as access regulation and interconnection obligations. OTTs currently do not face such remedies. But shouldn’t Apple be forced to provide access to its ecosystem? Or should Google be obliged to offer access to their data sources? The dominance and the increasing revenues of several OTTs, which are establishing a content monopoly, might be the initiator of this claim.
The traditional telcos in many countries were ironically also monopolies and were forced to open the access to their essential facilities. The evolving question is whether the monopoly of popular OTTs, such as Google or Facebook active in a two-sided market model, also qualifies for similar approaches.
The final paper will focus on the key question whether access regulation should also be enforced at higher levels of the value-chain of the Internet, namely at OTTs with a two-sided market model. Therefore, we will briefly review the characteristics of the (regulated) bottleneck constituted by traditional telcos and compare these findings to the characteristics of emerging OTT-Players. It can be seen that the preconditions for regulating infrastructure services vs. content services differ. Whereas in the case of traditional telcos the physical infrastructure with immense sunk costs causes the (monopolistic) bottleneck, OTTs establish a proprietary virtual network cohered by data and participation. Although not all OTTs employ a two-sided market business model (cf. Hagiu and Wright, 2011), we focus on these players as a result of current debates and, more importantly, a completely different market form, which needs to be taken into account.
Traditionally telcos offer infrastructure services to end consumers, both at a wholesale and at a retail level. This constitutes a one-sided business model. Thus, telcos have an incentive to charge high prices and to serve only those customers with a high valuation for the service. In contrast, an OTT in a two-sided market acts as an intermediary who needs to “bring both sides on board” and has an incentive to price efficiently (Rochet and Tirole, 2006). Hence, a comparison of key principles according to the market mechanisms and incentives of the involved players seems necessary. In terms of access to an essential facility a vast amount of economic literature evolved over the years (e.g. Laffont and Tirole, 2001) and indicates that some kind of regulation of the access market seems appropriate to achieve stated goals such as efficiency or innovation. Considering two-sided markets, the conclusions are less clear. Although there is a tendency that intermediaries in two-sided markets gain a certain amount of dominance not necessarily harming welfare (cf. Caillaud and Jullien, 2003), the paper will consider examples of proponents who claim to open the ecosystems of dominant OTTs making it mandatory to analyze the mechanisms and effects of two-sided markets. The paper will therefore also look at models in the context of two-sided markets and, after pointing out their relevance in the context of OTTs, examine the welfare implications. Particularly the effect of a hypothetical opening of two-sided networks seems relevant in the context of established proprietary virtual networks.
The paper will conclude by comparing the two different market forms, i.e. one-sided and two-sided markets, and highlight their main differences. Based on the extant literature (cf. Schiff, 2003), we argue that in comparison to the motivation in traditional monopolistic bottlenecks, opening existent virtual networks may lead to less competition, although the (social) welfare implications may also be positive. These implications may be of paramount importance in the topic area of OTTs with proprietary databases or separated networks; especially with respect to the ongoing debate concerning dominant OTT networks and ecosystems such as Android, iOS or Facebook.
Keywords: over-the-top services, two-sided markets, bottleneck, access, regulation
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