There is little doubt that the consequences of the lockdown induced by the Covid-19 pandemic would have been magnified in the absence of digital technologies. Given the value they create, it is no surprise that digital platforms stand to gain from the current situation. One remarkable example is the rise of Zoom, a video-conferencing service. Unknown to the general public at the end of 2019, Zoom experienced a twenty-fold increase in its user base over the next three months, reaching approximately 200 million daily users in March 2020.1 Its ease of use and mostly free-of-charge service has made Zoom the preferred choice for companies, institutions, and private users alike.
Its impressive user growth conferred Zoom significant network effects, a term coined by economists to describe the benefits individual consumers enjoy from tapping into a large user base. Network effects can make it hard for potential competitors to dislodge Zoom. Users will think twice before switching to a competing video conferencing service that few colleagues or business partners use.
In addition to such network effects, the sudden increase in usage intensity guarantees Zoom ample amounts of what is probably the most valuable currency in the digital era: user-specific data. The empirical work of Schaefer and Sapi (2019) suggests that the network effect and the effect of intensified data collection can reinforce each other: in digital services, users do not just derive utility from a large customer base but also from service quality. For example, in virtual meetings, users care about audio and video quality, smooth functioning of large-scale events, security, and many more features. Having a diverse set of users and types of virtual meetings provides valuable opportunities to experiment with new features, observe user behavior, and collect user feedback at large scale. Many quality improvements rely crucially on combining large amounts of data collected from a broad set of customers. The resulting synergies of network effects and intensified data collection, which Schaefer and Sapi (2019) coin as “data network effects,” are likely to attract the attention of Silicon Valley tech giants. Potential future acquisitions of Zoom may aim to internalize and amplify these data network effects by integrating Zoom into existing data-driven business models.
In the scenario of a merger, antitrust authorities may confront the claim that potential anticompetitive effects resulting from acquiring Zoom’s data and customer base will be marginal. Standard arguments to defend this conjecture usually do not acknowledge the potential of a self-reinforcing effect between the size of the customer base and the intensity of user-specific data collection. This omission is likely to lead to an under appreciation of the true value of data and, consequently, its potential for anticompetitive effects.
The example of Skype (acquired by Microsoft in 2011), whose sluggish innovation was exposed by Zoom, highlights only one side of the negative aspects of mergers. By allowing the tech giants to enlarge themselves, we do not only risk foregoing the innovative potential of the acquired firms, we also face the bigger risk that we reduce the likelihood of competitors to expose the potential sluggishness in innovation in the core business areas of Silicon Valley’s dominant firms. Allowing them to acquire databases is likely to help big tech companies protect themselves from competitors - potentially much more than we initially conceive. The corona pandemic has likely set the stage for new high profile acquisitions in Silicon Valley, it remains to be seen how antitrust will react this time.
Sapi, Geza and Maximilian Schaefer. 2019. “Data Network Effects: The Example of Internet Search”
1 See nasdaq.com
This text was written as part of the new BSE Insights on the Corona Crisis series in which researchers of the Berlin School of Economics provide short texts with scientific content that is relevant for the crisis.