i3, une unité mixte de recherche CNRS (UMR 9217)

Institut Interdisciplinaire de l'Innovation

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Presentation by Pierre-Jean Benghozi, professor at the Ecole Polytechnique and researcher at i3-CRG at the “Digital Capitalism and Ideologies” seminar
Posted on 24 March 2022

Pierre-Jean Benghozi is one of the internationally recognised pioneers of research on the digital economy and the creative industries in France. Pierre-Jean Benghozi is Director of Research at the CNRS and Professor at the École Polytechnique. There he directed the Pôle de Recherche en Economie et Gestion (UMR X - CNRS) and the Chair "Innovation and Regulation of Digital Services" which he founded in partnership with Telecom ParisTech (2007-2013). He also teaches in several major Parisian and foreign universities. His expertise led him to be appointed as a member of the College of the French Electronic Communications and Posts Regulatory Authority (ARCEP), from 2013 to 2019, where he more particularly followed the regulation of "Enterprise" markets, the Internet of Things and the deployment of 5G and very high speed networks.
Since the 1980s, he has developed a renowned research programme at the Ecole Polytechnique on Information and Communication Technologies, Media and Culture. His most recent work focuses on the development of new forms of markets and organisation associated with the development of digital technology, as well as on the business models of the creative industries.

By changing the materiality and territorialisation of exchanges, the digital wave, which was born at the end of the last century, constitutes a real revolution in various ways, both for companies and for consumers. On the one hand, the possibilities of dematerialising flows are, for example, revolutionising production and supply chains as well as taxation methods. For example, companies can locate their headquarters in Ireland, manage copyright via the Netherlands and transfer their income from one country to another to optimise the nature of the flows and taxation. But on the other hand, the technological wave is also affecting increasingly equipped households by accompanying new forms of mobility. Many phones equipped with 4G have become essentially Internet connection tools. In France, some estimate the share of digital technology at 6% of GDP (150 billion euros). At the same time, telecommunications operators are investing more and more in infrastructure networks: around 10 billion euros, they represent a quarter of their revenue. Indeed, digital technology can only work if the entire territory is connected. With the development of uses, the prices of digital consumer services have fallen considerably over the last ten years, while all other services have increased. The maturation of the sector has been to the advantage of the consumer.
The capabilities offered by information and communication technologies have made it possible to achieve long-standing management objectives such as flows and processes, one-to-one marketing and targeting of consumer needs. Digital technology has therefore been a revolution for companies seeking to simplify processes as well as for those who were not seeking to do so but were pushed to do so by their customers. At the turn of the millennium, the first assumptions made about the new economy were that digital technology would lead to perfect bureaucracies and make markets where supply and demand are constantly adjusting more fluid. The expected results were, on the one hand, increased efficiency in terms of performance and productivity and, on the other hand, an improvement in market quality with prices closer to the balance between supply and demand. However, these hypotheses were quickly overturned by new economic models that fed the growth of the Internet of networks as much as they fed off it. In this respect, it is interesting to look more specifically at the cultural sector, which, particularly music, has served as a laboratory for experimentation: many of the innovations first implemented in this sector were subsequently generalised to the rest of the economy. These models were built on collaborative creation, design and production, taking advantage of networks of contributors who are less dependent on the location of a particular factory. New forms of organisation are being put in place that play differently with geographical distribution. For example, some translation companies offer to translate documents very quickly, allowing a text submitted in the evening to be available in the morning by having a translator on the other side of the world.
The models have also diversified enormously as a result of the massification of trade and the entry of non-professional producers into the markets. Here again, an illustration will clarify the matter. In the audiovisual sector, youtubers and influencers provide models of professionalisation and income generation based on content, skills, forms of recognition and monetisation methods that are radically different from traditional forms.
Another lever of transformation is finally the development of new forms of intermediation, ensuring at the same time an aggregation of offers, a capacity of orientation of consumers and a simplicity of interactions. By giving full weight to the processing and use of data, this economy of attention has become essential. In the field of transport, for example, the traditional intermediaries such as travel agencies have been gradually replaced by several types of platforms that put consumers in touch with travel and hotel providers.
One of the first consequences of these movements is that today, competition is no longer based solely on products, but also on business models: the way in which goods and services are made available and monetised. For example, the differentiation between, say, Spotify, Deezer or Amazon Prime, is made more by monetisation and interfaces, the selection algorithm or the quality of the sound provided and no longer by the exclusivity of an artist. Similarly, Uber's service offer is very similar to that of a taxi, but Uber differentiates itself by the quality of the service and the interface with the consumer. Start-ups are thus attacking established companies by rethinking the models that are becoming the core of the structuring of competition. The notions of business model are thus now central in the thinking of strategic management and economics. To summarise, they can be defined as the ability to bring together four dimensions: the innovative way of producing goods and services, the way of organising oneself, the type of relationship established with the clientele (type of transaction, subscription or not) and the way of making money or investing.
The success of companies thus depends on their ability to organise these four dimensions, but also on knowing how to articulate value creation (innovation strategy, production and value capture) in a specific way. In the case of Uber, value capture means that the platform generates and appropriates revenue without having to invest in a fleet of cars or employees. It is a pure market intermediary relying on a network of partners who will invest themselves. This was also the case in very old offers such as that of Interflora for example. This redefinition of value and capture involves reorganisation, thinking about production capacity and the configuration of resources... as much, of course, as a form of sharing the value created.
The role of intermediaries has also evolved. Traditionally, the intermediary aggregates supply and demand. They bring buyers and sellers together. They establish trust and guarantee transactions. The Internet has made it possible to disaggregate the classic modalities constituting supply because now the markets are international or globalised. This ability to disaggregate the market and rethink supply has led to new forms of intermediation and competition between actors. This dynamic is often described as the platform economy, but the term often generates confusion because it covers two distinct types of platforms: distribution platforms and technological platforms that articulate different components. The smartphone is a good example because applications are grafted onto this tool and will interact with it. The ecosystem of relationships and provision of services and product evolution is built on this technical basis. This logic of technical aggregation and distribution means that the platform benefits from a size premium which tends to make it monopolistic. This platform logic can be found on B-to-C platforms but also in the B-to-B sector. For example, Amazon was clever enough to open up its e-commerce platform to all other merchants - even competitors - who wished to do so. The merchant who sells through Amazon knows that he has access to tens of millions of consumers: but by doing so, he contributes to making Amazon the reference, quasi-monopolistic, site of online commerce. These prescription-based models call into question the way economists usually consider the functioning of markets as a place of equilibrium between supply and demand, through the quantity exchanged and the price. What is exchanged here is also information. Therefore, three different markets exist side by side: a supply and service market, a recommendation market and a referral market. Part of the price of a product bought on Amazon pays for the link, another part pays Amazon as a prescriber (% on the transaction) and a part is linked to the fact that a certain number of merchants will pay to be sponsored in Amazon's recommendations. What is exchanged is financial flows and information.
The platform market is a two-sided market, like the media, which offer both an advertising medium to advertisers and journalistic content to its audience. In the same way, the layout of digital platforms maintains - or even requires - the existence of two clienteles: merchants and customers, clienteles that are different but ultimately interdependent on each other through the products that are exchanged. The Amazon and Netflix platforms started on this basis, by doing distribution. But the position of strength built on this basis is now leading them to evolve in order to be present on the whole value chain. Apple has moved from devices to online service publishing and distribution. Netflix has moved from DVD distribution to streaming, online service and production. Amazon has moved into production of streaming services but also into devices by offering e-books and kindles. Nowadays, competing players are doing so with very different business model structures. For example, telecom operators compete with internet and platform players but provide most of the jobs (77%) while internet players provide 2%. Conversely, in terms of revenue capture, the proportion is in the other direction: much lower for telecom operators than for internet players. These disparities are interesting because the evolution of value scales means that players will find themselves on the same links from different economic models while having totally different structural and revenue costs. The situation is all the more problematic for the players because the repositioning of the value chain is leading to a form of porosity between three major markets: that of network operators' infrastructures, that of terminal manufacturers' equipment, and that of digital platforms' content and service offerings. These markets, which were previously different, are now competing with each other, but on the basis of different resource capacities, and are organised around unprecedented interweaving of monetary and geographical flows.
The economic exploitation of data is therefore part of the Internet revolution, with the emergence of new business models based on the monetisation of data: sale of user profiles, referencing, etc. Exploiting data today means operating a whole technical ecosystem of intermediaries. Everyone is going to build and mobilise this data. Industrial forms are becoming more complex and alternative models can offer the same goods. Until now, the strength of car manufacturers has been vehicle construction. With electric vehicles, their core competence built on the design of combustion engines has disappeared, leading them to face new entrants from the internet (Uber or Tesla) with radically new business models. These forms of competition between car manufacturers, equipment suppliers and digital players show that in this ecosystem of data construction, the way in which positions are organised in the value chain becomes decisive.
As competition is based on business models as much as on goods, the proliferation of economic models is reflected in the variety of commissions taken by the multiple aggregation platforms. Some take very low commissions while others go up to 30%. There is no single model. Similarly, free content is ubiquitous in online content, but the forms of free content can be different. Some content is free because it is backed by payments when the customer wants more, others are free because the data provided by consumers pays the platforms, etc.
Consumer control is therefore exercised by dominant platforms that compete with each other and seek to enclose users in a closed ecosystem that they control (known as a walled garden): this may be due to technical standards (Apple), aggregated subscription offers (Amazon), or registration in social communities (Facebook). In this configuration, the triggers for the act of purchase evolve naturally, giving full weight to the point of entry and the role of brands in the consumer journey.
In conclusion, the challenges of dematerialisation are accompanied by a profound redefinition of the forms of competition: new business models, new substitute products, new entrants, etc. This variety of dynamics at work calls for the economy to be thought of from now on as moving from a vision based on the model of manufacture and production of physical goods to one based on the creation and management of infrastructures with fixed costs and network effects. These infrastructures concern communication networks as well as information networks, databases and cloud servers. This has consequences for the strategies of firms as well as for the regulation of markets. The difficulty lies in the fact that the new structuring of the digital era has also led to the establishment of new regulatory frameworks and objects: national and international for globalised companies, at continental level with the political weight of Europe for example. Regulation is much more complicated to implement in this international framework because a balance must be found between national sovereignty, sectoral policies, anti-trust regulations and incentives for innovation. There is a complicated interplay between support for national players and regulation of dominant platforms.



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