Decoding vertical tech integrations: why do they matter?

INTRODUCTION

In recent years, major tech platforms have been rapidly evolving their business models. Despite their dominance in various markets, tech giants like Google and Meta are venturing into new territories to expand their user base. One of the most striking ventures has been their foray into the "connectivity market" through substantial, and occasionally unsuccessful, investments in network infrastructure.

Many tech companies are investing resources into network infrastructure, either directly or via long-term contracts. Their investments span across edge network infrastructre, fibre investment, contracts with telecomms operators, and perhaps more alarmingly, deployment and investment on submarine cables and data centres.

In some cases, these agreements resemble a vertical integration strategy, where companies seek to control more than one stage of the supply chain by partnering with traditional telecommunication or infrastructure companies. However, partnership is not the sole strategy being undertaken. These companies are transforming this venture into a core part of their business. They are aiming for comprehensive control and growth in the connectivity and infrastructure markets. The ultimate goal is likely to be internet service and infrastructure providers.

The motivation behind it

But why are these companies taking this route? There are several reasons. One publicly stated reason is the desire to connect the unconnected and facilitate digital transformation. As an example, the Australian Minister for Communications, regarding a Google project in the region noted that “Diversifying Australia’s connectivity and supporting digital inclusion across the globe are both incredibly important objectives, and Google’s Umoja cable will help to do just that.” Similarly, the partners in the 2Africa project, which includes Meta and Vodafone, assert that they "believe that access to broadband is essential for sustainable growth and development because communities and economies flourish when there is widely accessible internet."

Connecting the unconnected is an incredibly laudable mission. However, as noble as it sounds, these companies might also achieve something else in the process: reaching more customers and expanding the reach of their content market. In Africa, for example, only around 36% of the population is online. Providing connectivity to those that are not yet connected opens the possibility of growing their user base and extending their control to more than 60% of the population, who will now be potential clients for their products.

In addition to expanding their client base, these companies are potentially gaining another form of power that could hinder future attempts to regulate them. As they manage more of the underlying infrastructure that societies rely on, they are becoming too big to fail or break up due to their critical importance. As such, they could wield immense political influence, and if they threaten to withdraw—especially those managing essential infrastructure—the potential damage could be immense.

Cause for concern?

One might ask: is this necessarily bad? Why does this matter? From a competition or consumer perspective, this development should concern us or at least raise some alarms, for several reasons:

1. Control Over Infrastructure

Controlling the infrastructure in communication markets is a significant advantage. Whoever controls the infrastructure wields substantial power in how they deliver their final services. Depending on their position in the supply chain, these companies can manage the network and content distribution in various ways, controlling speed, congestion, and even monitoring the data and information that end users access. This control ultimately determines the quality of the final service and potentially gives them the power to gain competitive advantages for their products. This raises issues that have been studied for a long time in the net neutrality debate, which points out that this could potentially create barriers to new competition in the content market.

As Google has stated, their investment allows for significant flexibility in making these decisions: "Equiano will be the first subsea cable to incorporate optical switching at the fiber-pair level, rather than the traditional approach of wavelength-level switching. This greatly simplifies the allocation of cable capacity, giving us the flexibility to add and reallocate it in different locations as needed. And because Equiano is fully funded by Google, we’re able to expedite our construction timeline and optimize the number of negotiating parties.”

2. Lack of adequate regulation:

The control over infrastructure becomes more relevant as there is often a lack of regulation for these companies because they often operate in a vacuum or in regulatory grey areas, sometimes even disregarding existing regulations, as evidenced by Elon Musk's Starlink, which continues to provide services in unauthorized regions despite licensing warnings.

Another issue arises with initiatives that market themselves as serving the public interest, such as "Internet para Todos" in Peru. Operating under the category of Operador Móvil de Infraestructura Rural, this initiative benefits from a special regulatory framework due to its social purpose and its partnerships with governmental and financial institutions.

Regulatory approaches such as this might end up scrutinizing only one segment of the supply chain, namely the segment with a social purpose, without considering the entire ecosystem in which these companies operate and profit. This narrow focus can lead to gaps in oversight and a lack of understanding of the broader implications of such initiatives.

In the end, even when treated equally, these companies can exploit regulatory gaps to their advantage. For example, in countries without net neutrality regulations, they may prioritize their own services, causing more harm than the well-studied and scrutinized traditional zero-rating practices.

Another critical aspect is that companies controlling multiple layers of the supply chain will likely become increasingly difficult to regulate in the future. As governments, societies, and other businesses grow dependent on these infrastructures, attempts to impose regulation may carry unintended consequences that could be challenging to manage.

3. Highly Concentrated Markets:

These companies are often entering to highly concentrated markets. For example, the submarine power cables market is partially consolidated due to the small number of companies operating in the industry, even though it has been growing due to the investment of over-the-top (OTT) services. Additionally, around 97% of worldwide internet traffic depends entirely on submarine cables, making them critical to global communication, including financial and military transactions, and indispensable for global security. Do we want to entrust this power to private entities that have a stake in both parts of the market?

Also, when tech giants own the "last mile" and act as internet service providers directly to unconnected communities, they often establish a monopoly. This is considered by some as a "beneficial" monopoly because it is established in places with lower population density (which represent fewer consumers) and lower income levels (resulting in lower profitability per user), making them unattractive to traditional market players. According to the GSMA, economically viable locations for big operator require at least 3,000 active subscribers per month. So why do these companies want to provide services in what seems to be a far less profitable market? Because, as explained earlier, this might allow them to capture more users and leverage the connectivity and infrastructure market to gain advantages in their content market.

Initially, this may appear as a positive development as it brings benefits to communities by granting them access to connectivity and the advantages of the digital world. However, it also poses some risks. As Luã cruz, Fellow at the Green Web Foundation, has stated, this reliance leaves these communities susceptible to the whims of a single company, which could potentially wield immense power over their access to communication and information. These whims are usually driven by the necessity of making their other markets profitable, meaning they will have incentives to influence the service they provide (at content level) and that they will have the right tools to do it. A reminder here that Google and Meta are both advertising companies first who make most of their revenue by displaying targeted advertising on their and others' platforms. Deploying access to small communities is not part of their business model.

These practices of influencing content can have significant consequences for democracy and human rights, as they can shape public opinion and restrict access to information. Furthermore, having access to only one source of information increases the exposure to misinformation and reduces the ability to critically evaluate and cross-check information, which is essential for a well-informed society.

It is important to note that there are other initiatives that address the digital gap within these "unprofitable" communities without encountering these issues. These initiatives could be a viable option for connecting remote communities without replicating the same power structures. They could prioritize the communities' desires and autonomy, allowing them to decide whether they want this connectivity and, more importantly, how they want to be part of it.

A prime example of how such companies operate is the Internet.org initiative, launched by Meta (formerly Facebook) in 2013. This initiative, which started in collaboration with six partners, was ostensibly aimed at providing internet access to unconnected populations. However, in reality, it only offered access to a curated selection of services. This selective access drew criticism for violating net neutrality principles and for discriminating against companies not included in the initiative. Although the initiative ultimately failed, it revealed an underlying strategy of these connectivity projects: leveraging first-mover advantage to generate network effects and entrench their market position.

Another example about the complex dynamics of managing multiple parts of the supply chain in these markets are highlighted by recent developments involving Starlink in Brazil. The Brazilian Supreme Court recently imposed a block on X due to the platform's failure to meet a deadline for appointing a legal representative in the country. To enforce this order, the Brazilian telecommunications regulator, Anatel, directed internet service providers to suspend user access to X. Initially, Starlink informed Anatel that it would not comply with the Supreme Court's order. However, after having its assets frozen, Starlink reversed its stance and agreed to enforce the court's order to block X.

This situation underscores how Starlink’s approach to providing internet access differs from that of traditional service providers. It illustrates the challenges in understanding how these interests align and how they reflect a unified economic group despite their different services.

4. Surveillance capabilities and data concentration:

Submarine cables play a crucial role in transporting vast amounts of sensitive data, which underscores the necessity for multiple efforts aimed at regulating and safeguarding them against various vulnerabilities. The responsibility for protecting this information, managing its flow, and ensuring secure storage primarily lies with the companies involved.

Nonetheless, a significant concern arises when these very companies also serve as service providers. Service providers possess the capability to scrutinize traffic using technologies such as Deep Packet Inspection, enabling them to analyse and potentially use this data elsewhere in the supply chain.

While any ISP can deploy DPI, the information gathered can be highly valuable for expanding a company's influence in various markets. Without specific regulations, major tech platforms might be tempted to leverage this data to their advantage, particularly in content markets where consumer patterns hold significant value. Although DPI is not a silver bullet, it can reveal consumption patterns that offer valuable strategic insights.

Another example is DNS services. ISPs usually provide DNS service by default, a core component of the internet that translate domain name such as Google.com into their Internet Protocol (IP) numerical value such as 1.1.1.1. By providing this service, ISPs fundamentally know every website that their clients visits as they will receive a DNS request before the client reach a given website. As they are already capable of uniquely identifying their customers (through IP addresses or other means), they effectively have the entire browsing history of each of their clients.

This raises important questions: Does granting such extensive power to these companies lead to potential misuse? Do these arrangements create perverse incentives for leveraging inspection powers solely for profitability?

Conclusion

While the investments by tech giants in network infrastructure have the potential to drive connectivity and digital inclusion, they also present significant risks that need to be addressed.

PI aims to understand the real-life consequences of these investments by analyzing how they affect competition and the regulatory landscape. We seek to explore practical solutions using competition and regulatory tools to ensure that the benefits of connectivity do not come at the expense of market fairness and consumer rights.

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