How do we balance the benefits and risks from the digital technology giants?

Digital technology giants such as Facebook, Google and Amazon create value  through their technology, network effects, information non-rivalry, and through managing aggregated or “big data” in service delivery. 

However, their dominance creates market power concerns.  Big data misuse can erode civil society and challenge democracy itself. The big digital technology companies control personal data, and this creates privacy concerns. There are calls for tighter regulation, yet these companies are productivity-enhancing technology leaders, and they deliver “free goods” and new affordances for society. 

How then can we optimise the benefits from the digital technology giants, while managing risks?

People value privacy to protect themselves from material harm such as identity theft, and also because it is bound up with self-identity, individual rights and personal freedoms.  Information or data that private firms or government have about a person has important privacy implications.

From 1890 Louis Brandeis began to create a basis for the right to privacy and legal protection for it.  As a Supreme Court judge he was a free speech and privacy rights advocate, and he opposed big business monopolies.  In the 1960s Alan Westin started to lay the legal foundation for consumer data privacy protection suited to the digital age.  He framed privacy as the right to control how much of ourselves we reveal to others.  Westin closely associated privacy with personal freedoms. 

In recent years data privacy breaches, including alleged misuse of data for politically manipulative purposes, has roiled around digital technology firms, including Facebook and Google.

However, such companies have strong incentives to protect privacy and to safeguard consumer interests more generally.  For example, Facebook is a two-sided platform company with consumers and advertisers interacting through a common platform.  Facebook must retain both sides confidence and avoid privacy breaches to stay in business.

Recent decades have seen digital technology transform economies and societies, and play a pervasive role in almost everyone’s workplaces, homes, and in their lives more generally.  Consumers have rewarded the lead digital technology businesses, and investors have valued this.  As at March 2020 the top five biggest US companies by market capitalisation were all digital technology companies – Microsoft, Apple, Amazon, Google and Facebook.  Their success reflects the digital and computational technologies they have harnessed, and the non-rivalry and networking economies these give rise to.

These technology-based companies have transcended the constraints of mainstream product market businesses.  In the traditional business model, a firm draws on supplier inputs, adds value, and then delivers products or services to customers.  The product mix is typically physical rival goods that can be “consumed” only once.  However, internet-leveraged digital technology has given rise to firms based on non-rival goods, that is “goods” such as information where one person’s use does not deprive another of that same information. 

While it is expensive to create valuable information, once created the marginal dissemination costs to additional users can be near zero.  Non-rivalry drives marginal costs down and helps big digital technology companies deliver consumer as well as producer surpluses.  Consumer benefits include free goods such as Youtube, Google Maps, and social media connections that pervade our lives and fall outside market exchange and GDP statistics.

The digital technology giants exploit network effects that arise when something becomes more valuable to consumers as more people use it – a telephone network in the old economy or a digital technology platform in today’s economy.  Network effect accumulation is akin to the “Matthew Effect” in the Bible – “to he who has shall be given even more”. 

Dominant digital technology companies strengthen their hold through software upgrades, new functionality, and tight control over data channels.  They learn constantly from platform users’ search inquiry patterns and revealed preferences and draw inferences from them. 

Industry dominance by a few or even one company does not necessarily lead to efficiency loss and stagnation.  For example, when America’s telecommunications industry was highly concentrated in AT&T, researchers working in AT&T’s Bell Laboratories helped develop radio astronomy, the transistor, the laser, the photovoltaic cell and other transformative technologies that had impacts far beyond AT&T’s commercial interests. Nine Nobel Prizes and four Turing Awards were awarded for work completed at Bell Laboratories. 

America’s digital technology sector is highly concentrated, and some key companies  have bought out likely nascent competitors.  They have used their network economies, data aggregations (“big data”) and control over data channels as barriers to competitive entry. 

However, these companies deliver knowledge and technology spill-overs that feed into wider innovation they cannot fully capture the benefits from.  They also diversify and create value in new markets.  For example, Google began as a search engine and has diversified into business management and communication tools, email services, cloud storage, language translation, research tools, mapping, navigation, and self-driving cars. 

Companies such as Microsoft, Google and Amazon provide connectedness and other capabilities to respond to societal challenges with speed, flexibility and fitness for purpose.  In the coronavirus crisis they are helping keep essential services functioning during lockdowns, and facilitating the connectedness that helps international researchers deliver new vaccines at unprecedented speed.

There has always been a public good and open society culture in the digital technology sector.  The internet is the ultimate network of networks, and the uber-platform for platforms.  It has made possible many non-profit public good initiatives.  An example is Wikipedia – an information resource with unparalleled global heft. 

However, some digital capabilities and networks that promoted internationalism have at times been turned into tools for nationalism, separatism and political polarisation.  The Facebook-Cambridge Analytica incident that played out over 2014-2018 highlighted the potential for big data to be repurposed for political purposes.  Digital technology, including social media, has been used to interfere with democratic processes in Europe and the United States. 

New challenges to privacy, civil society and democracy are looming, and may well be amplified by computational and artificial intelligence advances.  For example, biodata, face and voice recognition technology will allow inferences to be drawn relating to an individual’s health risks.  However, such technology could also be used against individuals, for example through capturing and analysing data relating to ethnicity, beliefs, values, personality, peoples’ vulnerabilities, and how behaviour can be predicted and perhaps manipulated in different contexts and scenarios. 

Such dystopian risks may come as authoritarian governments command such technologies.  However, democratic governments, polities and civil society can channel new digital technologies towards good social purposes.  A further check on authoritarian power abuse is the distributed nature of the Internet, the private ownership of key companies, and VPNs that protect private information.

Governments have been under pressure to regulate and perhaps even break up digital technology giants.  However, society as a whole benefits from these companies’ technological contributions.  Heavy-handed regulation could stifle innovation, reduce benefits from technology spill-overs, and create huge compliance costs.

Breaking up dominant digital technology companies could fragment their aggregated databases (their “big data”).  However, in both the private and public sectors the most powerful insights, explanatory power and predictive analytics depend on big data aggregations.  The more data available the more value that can be created from its analysis.  This is true whether the big data is held by Facebook and Google or in government databases such as New Zealand’s integrated data infrastructure (IDI). 

There may also be opportunities for government and technology companies to partner together on joint analyses using both public and private sector big data to support non-proprietary applications, for example public health objectives.

In relation to privacy concerns, excessive transaction costs make it impractical for individuals and digital technology companies to negotiate bespoke agreements on private data ownership and how such data can be used.  However, consumer data rights (CDRs) can create individual rights over personal data held by a private company – New Zealand government agencies are working on this.

In Europe, the General Data Protection Regulation (GDPR) enforces data portability. CDRs in New Zealand could make consumer data held by a company portable to a third party.  Consumers could use their rights over portable data to opt for better banking, utilities and other services options.  This might be especially beneficial in encouraging open banking and fintech innovation.  It might also in some small way help check the dominant power of the big digital technology businesses. 

The optimum overall approach is therefore not to tightly regulate the digital technology giants, and rather to allow them high freedom to operate subject to strengthened individual data rights, for example through CDRs.

About Peter Winsley

I’ve worked in policy and economics-related fields in New Zealand for many years. With qualifications and publications in economics, management and literature, I take a multidisciplinary perspective to how people’s lives can be enhanced. I love nature, literature, music, tramping, boating and my family.
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