Wharton Program on Digital Strategies and Fair Digital Competition
Professor Eric K. Clemons
1. Introduction to the Wharton Program on Information Strategy and Economics
Wharton Information Strategy and Economics is an ongoing research program started in 1985. Our center has been refocused to address a number of issues in Digital Strategies and Fair Digital Competition, motivated by a change in search, a change in consumer behavior, and emerging changes in outsourcing and cloud-based computing. Our intention is to serve as a focal point for studies of interest to corporations, legislators, and regulators, as they work through the issues created by new digital modes of interaction, new market forces, and new competitive opportunities. We also expect to continue looking at potential breakdowns in market regulation, and resulting new threats to existing businesses and to the competitive environment, some fair and some potentially warranting regulatory intervention.
2. A Portfolio of related strategic studies
We have identified six topics of strategic interest to our corporate sponsors. Additional topics will be added based on the interests of these corporate sponsors as they evolve over time.
- We have begun to address cloud computing as an extreme form of outsourcing and the design of appropriate contracts for managing the risks of cloud sourcing. As a form of outsourcing, cloud computing can create extreme risks for clients, and as a new form of outsourcing these risks may not be fully understood or fully manageable through traditional contractual mechanisms. In particular, as clients adopt more and more advanced features (for example, those present in Platform as a Service and Software as a Service), their ability to switch vendors may be quite limited and their vulnerability to vendor hold-up may be unacceptably great.
- We have begun exploring the role of newly emerging online business models, like the third party payer business models of Google, Groupon, and others. In a third party payer model, party one (e.g., a traveler) uses party two (e.g., Google) to find party three (e.g., a hotel or airline). Since party three needs to be found, and party two makes that possible, party three pays for being found, or, more precisely, to prevent not being found. Since the user is not paying anything, price is not an object for the user, and as long as the user chooses to use, the payer has no choice but to continue to pay.
- We will continue to address the changing nature of consumer behavior and implications for corporate strategy, product design, and portfolio mix. In particular, community content websites and social search are replacing traditional, controllable advertising as principal drivers of consumer behavior. This has virtually eliminated the role of economies of scale provided by advertising, eliminating the advantages of incumbents in a range of industries including soft drinks, snacks, ice cream, and beer. The resulting profound changes in consumer behavior and in corporate strategy have been described in terms of trading up, and trading down, and trading out, pursuit of the long tail, or resonance marketing. The role of resonance marketing and the changing role of previously dominant players is still being sorted out in mature markets, and is gaining importance in emerging markets like China as the Chinese middle class gains in sophistication and purchasing power.
- We have studied the changing nature of channel power and distribution for the past 25 years, watching and predicting the changing balance as some distribution channels are disintermediated and others are not, and as some channels are reintermediated while others are not. We study when channel encroachment should be a concern of existing players and when it should not: Airlines disintermediated traditional agencies, but traditional consumer package goods manufacturers have had no success in moving to online sales or in replacing supermarkets. Global distribution systems (GDS) and online agencies are fighting airlines and travel companies for control over sales and the revenue produced by sales. Recent moves by search engines, like Google, may create an enormous power shift, and may eventually effectively replace both agencies and GDSs, and create a stranglehold over companies dependent upon third party distribution.
- We will continue to address pricing in the presence of changing information endowment. We have gone from one price for credit cards to thousands, and can see name-your-own- price systems competing with traditional fare wars in hotels and air travel. The ongoing debate about pre-existing conditions, the use of genetic testing to discover “pre-existing future conditions”, and indeed the public’s confusion about adverse selection and the nature of insurance more generally has made information endowment a visible and contentious problem for politicians, industries, and their regulators.
- We have begun to analyze the changing prospects for traditional media. First, we wonder if traditional media companies can survive in an era of free online internet news. We believe that traditional media companies are essential to the future of participatory democracy, since participatory democracy is really possible only with free and unfettered investigative journalism. Free (as in upaid) journalism, crowd sourcing, and the emergence of websites like digg, and delicious may not be a substitute for traditional media. If professional journalism is essential, how can we ensure its survival?
Our research agenda, as in the past 25 years of our center’s operation, will ultimately be determined by our corporate sponsors and by our advisory board.
3. A Portfolio of related policy-focused studies
We have already identified four topics of interest to regulators. Additional topics will be added based on the interests of our corporate sponsors.
- We have begun to study the potential for the manipulation of searchand implications for informed participatory democracy. Our preliminary studies suggest that monopoly in search can influence opinion, and can even influence the outcomes of close elections. That is, monopoly of search can trump diversity of journalistic sources. This does suggest some specific responses and follow up research.
- We have begun to address the changing nature of public discourse online and the implications for politics. We are making the transition from professional, responsible journalism to crowd-sourcing and blogging, to community content, and finally to content-free celebrity micro-blogs and twitter. On one hand, the uncontrollable and diverse collection of viewpoints may be good for participatory democracy; on the other hand, the fragmented and irresponsible nature of alternative media may not represent an improvement.
- Likewise, we have begun to study the potential for the manipulation of search and the implications for commerce. Recent work suggests that manipulation does occur, allowing search vendors to advance their own offerings and engage in preemptive line extensions. New forms of search may be even more preemptive and even more predatory. We will need to explore the potential for commercial harm and harm to competition, and, if it is present we will need to make the case very carefully and clearly, since at present consumers do not appear to care.
- We have begun studying the changing nature of competition, and the need for corresponding change in commercial law. Industry boundaries are blurring and it is difficult to determine what constitutes a competitor (e.g., Google’s recent moves into travel, their moves into journalism, their moves into technology services, and their claim that they should be treated as just another small player in the advertising sector). The following legal issues all require attention: Relevant market — how does one define a competitor? Essential facilities doctrine — how does one define competitor for the determination of denial of critical or essential services or denial of those services at a fair price? Hot news doctrine and fair use doctrine — how does one define a competitor for a traditional media company? Regulation of third-party payer models and the almost unlimited power of search vendors— parallel structure would indicate using a “how” question here may provide legal theorists with a justification for a new regulatory model, much as network effects and participation externalities provided the basis for the Kingsbury Commitment and the first regulation of AT&T as a natural monopoly in 1913. Even harm, legal standing, and right to bring suit if harmed may need to be reexamined.
- We have begun to examine the role of standards and regulation in cloud computing, to understand vendor power, switching costs, and lock-in. We need to be able to explain the differences between lock-in and switching costs, as they are so different in extent as to almost represent different concepts (lock-in results for a switching cost that is so great it cannot be overcome under any circumstances; in general switching costs are not binary, all or nothing, and either negligible or insurmountable). We need to understand the extent of switching costs, their sources, and the role of standards in managing or mitigating them. Sources may include unique differences in hardware, differences in development platform software, and differences in data formats, and switching costs will almost certainly differ among vendors of infrastructure as a service (IaaS), platform as a service (PaaS), and software as a service (SaaS). We need to understand the critical role of data hostages in increasing switching costs and, indeed, potentially creating lock-in. We need to be able to understand formally, to measure, and to model the degree of vulnerability, perhaps through a formal measure of “exit ability.” And we need to be able to communicate, credibly and effectively, with regulators across the globe.
4. The Mission
Our principal mission now, as when we began 25 years ago, is to be a credible resource for our corporate sponsors and credible resource for global regulators. Our principal role is to identify emerging trends early, before they have been noticed by consultants or the business press, to examine them, to provide new ways of thinking about them and their effects on business, and to provide discussion of strategic implications.
4.1. A Credible Resource for Corporate Sponsors
First, and foremost, we will continue to address the formation of strategy in a digital age, where technology has altered individuals’ social interactions, their access to information, their use of information, and their brand loyalty, and consequently has altered consumer behavior. This, of course, alters the strategies available to firms, their modes of interaction with consumers, their modes of interaction with supplier and competitors, and the range of strategic responses available to them. In brief, we seek to understand relevant technologies and their strategic implications.
One of the strengths of our research methodology has been the early recognition of emerging patterns and radical shifts in the competitive environment, allowing the early identification and exploitation of opportunities. This is what we did for 25 years, in industries as diverse as finance and media, travel, and consumer packaged goods. We were among the first to write about managing the risks of business process outsourcing (1991), about the impact of the net on travel (1996), and about the much smaller impact of the net on grocery distribution and retailing.
4.2. A Credible Resource for Global Regulators
We will work with regulators to identify the new legal and regulatory problems created by emerging technologies. We will seek to describe when and why traditional commercial regulation and legal codes break down. We will seek to understand the risks of consumer and corporate harm, and to identify the true threats and mechanisms for managing them. We will work to communicate our analyses to policy makers and regulators around the world, to maximize the benefits consumers receive from technology.
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