Dr Matthew Bennett 14 September 2015 Big Data How does one identify when big data is an issue? Dr. Matthew Bennett, Vice President, CRA 1

When is big data likely to be an issue? Dr Matthew Bennett 14 September 2015 Overview What is big data and what is it not? How is bid data different from other issues? What are the implications of bid data for competition policy? How does one determine whether bid data is an issue Some interesting research in the context of ‘Search’ 2

When is big data likely to be an issue? Dr Matthew Bennett 14 September 2015 What is a “big data” issue? A “big data” issue arises when: i.certain data is a key input into production (in particular, is crucial to producing a good-quality product); and ii.this data can only be acquired through serving customers. If both these conditions hold, this creates a barrier to entry/expansion. There is essentially a catch-22: firms need the data to produce a good product, but they need a good product to attract customers and hence acquire the data. Even efficient entrants with potentially excellent products will be unable to enter or unable to compete effectively. 3

When is big data likely to be an issue? Dr Matthew Bennett 14 September 2015 What is not a “big data” issue? Need to differentiate “big data” issues from: Multi-sided markets and network effects – these can be very important but are something separate, as they are not directly affected by whether a firm has access to data. The general “virtuous circle” of more sales/revenues allowing you to improve your product and hence attract more sales – this is common and is not specific to industries with “big data”. 4

When is big data likely to be an issue? Dr Matthew Bennett 14 September 2015 Isn’t this a common issue in “offline” markets? This occurs offline too – but the effect is usually much less dramatic. Serving more customers (or selling more “widgets”) might give you information that allows you to improve your product (e.g. you learn more about what customers like, and can tailor your widgets accordingly). But is this data crucial to being able to produce a competitive product? Possibly not – you could differentiate or improve your widgets in other ways and still compete effectively (albeit possibly at a small disadvantage). Could new entrants or smaller competitors acquire similar info (e.g. by employing a “widget consultant” or engaging in some market research)? Quite possibly – this is not really “big” data. 5

When is big data likely to be an issue? Dr Matthew Bennett 14 September 2015 Could the barrier to entry be overcome? In practice, even online there may be partial substitutes for the “big data”. For example, an entrant already active in another online market may have data from those customers that it could utilise in the new market. Entrant might be able to purchase relevant data from another firm. Such options unlikely to offer a perfect substitute. However, it may be “good enough” for at least a subset of customers. It would depend on the market as to whether this toe-hold could then be translated into wider effective competition, and a growing market share. If additional data is not entirely crucial, the entrant may be able to gain custom by improving product in other ways (i.e. simply incentivising customers to use it). There may be a threshold level of data – some “critical mass” of customers, beyond which further data is not very important. Similarly, data could be of relevance for only a certain amount of time. 6

When is big data likely to be an issue? Dr Matthew Bennett 14 September 2015 Implications for competition policy Actions by dominant firms may restrict rivals’ access to important data. E.g. firms may enter into exclusivity arrangements with downstream firms to be the sole provider of services. Note: other arrangements – such as those that make the dominant firm’s product the “default” on the downstream platform – could act as a proxy for exclusivity. In the presence of “big data” concerns, we can expect such arrangements to raise barriers to entry/expansion, and hence foreclose competition from the dominant firm’s competitors and potential competitors. All else equal, mergers in markets with a “big data” issue would be more problematic than those in markets without such issues. 7

When is big data likely to be an issue? Dr Matthew Bennett 14 September 2015 Identifying whether there is a “big data” problem (1/2) One can rule out a “big data” problem if the relevant data: i.is clearly not important to production; and/or ii.can be acquired in other ways than through serving customers. If it cannot be ruled out, then the scale of the problem is a case- specific, empirical question. This requires empirical economic analysis to examine the height of the barriers to entry/expansion created by the “big data” problem. N.B. Need to distinguish between an advantage gained directly from the “big data”, and an advantage gained from analysing data effectively – this is more difficult. 8

When is big data likely to be an issue? Dr Matthew Bennett 14 September 2015 Identifying whether there is a “big data” problem (2/2) Given the above discussion, key questions are: Can competitors and potential competitors acquire similar data through other sources? How crucial is the data in question to the ability to compete effectively? Is there a threshold level of data above which having yet more data is not important? 9

When is big data likely to be an issue? Dr Matthew Bennett 14 September 2015 Is evidence of a zero price relevant? In the online sphere many services are priced at zero to consumers. But this does not necessarily mean that there are no competition concerns. a)Firms may be charging high prices on the other side of the market (in this case, to advertisers). b)Users are often essentially “paying” with their data. Hence if competition is weak we might find low (or zero) prices but poor privacy offerings. If competition was made stronger we would then expect firms to offer more appealing options to users in terms of the treatment of their data. c)Firms also compete on quality as well as price. If competition is weak we might see a low (or zero) price, but poor quality and little innovation. Strengthening competition could be expected to lead to more innovation and higher quality. 10

When is big data likely to be an issue? Dr Matthew Bennett 14 September 2015 Search (i) Microsoft Argues there is a competition problem in the search engine industry. In particular, it believes Google’s large market share grants it a unique and unassailable competitive advantage, because it has access to much more data on user search queries than any of its competitors. Hence Microsoft is claiming exactly the sort of “big data” issue we discuss above. Google Claims that it has a higher-quality search engine product because it has invested more time and money in the product than its rivals. It is of the view that more data on user behaviour is not materially useful above a certain threshold. 11

When is big data likely to be an issue? Dr Matthew Bennett 14 September 2015 Search (ii) Note: the fact that Google spends more than its competitors on its search engine does not prove there is no “big data” problem. It is entirely possible that some of the results quality differential is attributable to spend, while also being the case that a large proportion is attributable to scale. This is something that needs empirical testing. It seems everyone agrees that search engine user data is not replicable through other sources, and that having at least some such data is important for product quality. The key question in this case is therefore: How important is additional user data at the scale of today’s search engines? Could a lack of data really be currently holding back providers such as Bing? 12

When is big data likely to be an issue? Dr Matthew Bennett 14 September 2015 Research by Preston McAfee (Rome 2015) Are there economies of scale in search? Preston McAfee (Chief Economist for Microsoft) examined the “click- through rate” (CTR) of both Google and Bing for unusual queries that materially increased in popularity during given period. Found that increase in searches associated with an increase in CTR, on both Google and Bing, suggesting that both search engines use additional searches to improve their results. Hence more data seems to matter for less common queries. Less common queries make up a significant proportion of searches on both Bing and Google (>50% of searches are unique on Bing!). 13

When is big data likely to be an issue? Dr Matthew Bennett 14 September 2015 Conclusions Big data issues are not new, they encapsulate significant economies of scale, and essentially make it harder to enter or expand vis a vis incumbents. This has obvious implications for both merger policy and for wider Article 102 cases (especially if one can demonstrate that behaviour is restricting access to that scale). However the key question is whether such economies of scale exist, and how important they are. This is an empirical question, and can only be answered by empirical analysis. Initial analysis of search shows some evidence of economies of scale, and therefore suggests that there may be a big data issue. 14

Dr Matthew Bennett 14 September London Tel +44 (0) Bishopsgate London EC2M 3XD United Kingdom Brussels Tel +32 (0) Avenue Louise B-1050 Brussels Belgium Paris Tel +33 (0) Avenue de l’Opéra Paris France Sydney Tel +61 (0) Level 23, Tower Oxford Street Bondi Junction NSW 2022 Australia