Riitta Katila: Innovation in a Time of Disruption
Welcome back. And now it's on to our second session, Innovation in a Time of Disruption, featuring professor Riitta Katila. The lightning talk will be immediately followed by a 10-minute Q&A so feel free to submit your questions in the Q&A box directly below the live video. Without further delay, I give you professor Riitta Katila. Hello everybody, so excited to be speaking to our alumni. Today in the next 15 minutes or so we will talk about ongoing research in our entrepreneurship and innovation center, the Stanford Technology Ventures Program here at MS&E. And the topic is whether pushing for
more regulation could drive increases in novelty and innovation in an industry. The topic is much in the news these days given how the pandemic has raised the power of dominant platforms. We are all cooped up at home and ordering stuff online, so the power of platforms and what we should do about it as a society is much in the news. My co-author is Sruthi Thatchenkery from UCL London, alumnus of the MS&E department, got her PhD a few years ago from the Standard Technology Ventures Program. And Sruthi is in the audience today. This project pulls heavily from what started as Sruthi's award-winning dissertation at STVP. We'll bring back to you your favorite antitrust flashback, the Microsoft case in the early 2000s. The big question we want to ask in this project
that showcases what we are doing at STVP today is, if we reduce the power of dominant platforms do we indeed get more innovation and more variety? So do antitrust enforcement and more innovation go hand in hand as is promised in much of the public debate today? This is ongoing work, other parts of this project are published in the journal Organization Science. But today what I will talk to you about is ongoing work and we of course welcome your comments and ideas. So why this project? Our focus is on regulatory interventions that target dominant platforms. So here think Google, Amazon, Microsoft, Facebook, Apple—the many antitrust cases that have popped up just in the last six months or in the last few years in the US, in China, in the European Union against these dominant platforms. So simply put, we ask whether the intent of this regulation is fulfilled. Should we expect to see more alternatives, more innovation emerged after we've regulated a powerful platform, so to speak, put a harness on a dominant firm.
So to give you a little bit of context of where we are going, some recent examples of antitrust regulation include Google just two years ago fined in Europe for bundling components, its own apps, with its mobile platform. In other words tying certain chrome apps on android mobile devices. So when you read the reasoning by regulators in this case and many other cases the statement almost always points to innovation as the motivator and specifically that dominant platforms block innovation in competitor markets. So it was a case in 2018 and again in 2019. And the more recent case in point is from October 2020. Perhaps even more relevant to the data that I will show in our analysis today the question is when Slack, your favorite workplace communications app, blames Microsoft for bundling Microsoft's own workplace communications app, Teams, with Microsoft's platform in order to keep businesses from trying out Slack and giving more eyeballs instead to Teams by bundling with a platform. So the big point
is that a dominant platform again is accused for blocking competition and blocking innovative other approaches for solving customers' communication problems. So the Slack versus Microsoft Teams case that many of you know is most relevant for us today because Microsoft of course was the defendant in perhaps the biggest antitrust case against a technology company in the last half century, colloquially known the browser wars of the 1990s and 2000s, which is the exact antitrust case in our data today that I'll show you in just a moment. So this new case on the screen is sort of a deja vu as Slack is saying in their file.
So our project today looking at whether weakening the power of dominant firms by adding more competition and increases in innovation go actually hand in hand, it's very timely. However in the light of prior work we really don't know whether these regulatory interventions that we see today work as promised. And the interesting dilemma is that dominant platforms may block other firms' innovation because they are so very powerful but they may also bring order to markets and reduce wasteful duplication of similar products and similar firms. So if you open up markets for more competition, kind of let all flowers bloom, does it mean that also some or lots of duplication will happen and then as a result no one profits? And if this is the case does it lower the incentives for firms to innovate in the first place? So as you can see the answer is not straightforward. And here's where we come in with the data.
So here's the project that we're working on in one slide. So the big question is, do dominant platforms block innovation as the regulators say? If we reduce the power of dominant platforms do we indeed get more innovation and more variety? Our setting for the data that I will show you today and what we've been working on is the regulatory shock that aimed to add competition to software markets. This is the Microsoft trial in the early 2000s. It tried to put a harness on the dominant Microsoft platforms both on the consumer and on the enterprise side. We focus on one specific complementor market to Microsoft's enterprise server platform, enterprise infrastructure software, and how innovation of firms in this specific market was influenced by antitrust trying to weaken the platform.
So for those who don't know our setting many of you know but for those who don't enterprise infrastructure software is the biggest industry you've never heard of. It is the invisible backbone of enterprise computing. It's used to maintain critical IT assets in a corporation. Think cyber security systems, management, etc. So what we will do is a focused data deep dive
and analysis using this specific segment and show you the results using data, what happened to innovation when Microsoft was regulated? So the spoiler alert here is what we find is antitrust case drives innovation drives increases in innovation but it hurts profits. So regulating Microsoft increased innovation but hurt profitability in the ecosystem. So the point is that the antitrust regulators were effective in a sense that weakening the dominant firm's ability to block competition sparked new opportunities for complimenter firms.
So think about it, there's a social benefit to anti-trust because innovation went up, but at the same time disrupting the order of an industry also is leading to losses in efficiency because no one profits afterwards. So very quick visual of what we have in the data, who is the platform, who is the complementer, who is trying to innovate here? Reminder so on the right hand side of this graph is grayed out the more familiar Microsoft Windows platforms on the user side. So if you're old enough to remember this is the time when all of us had Microsoft Windows installed on our desktops. So although the browser wars this case in 2001 is most commonly associated with this user side, that's way too messy for us to analyze. So we are not there today. Instead our data are from the left hand side of this graph which is a significant market, it's enterprise infrastructure. Here Microsoft's enterprise server platform was dominant, 51 percent market share, was strategically a very important growth market for Microsoft. And at the time Microsoft had also
entered in a significant way several of the complementor markets to these server platform apps—you could be thinking about them as apps—but was weak in some of the others, which gives us useful variation to analyze the case. So here is a quick visual of what we know and then I'll show you what we don't know and what we try to bring to you today. So when a dominant platform like Google or Microsoft more strongly also competes in a complementor market, so like the chrome app or the Teams app which is indicated with red color in this graph, prior work finds that innovation in that complementor market goes down for everyone, less innovation. What we don't know is what happens when antitrust tries to reduce this bright red color, reduce this competition threat by the platform and increase competition in complements, for example by making bundling illegal as was done in around 2001 for Microsoft. So the big
question is do we get more innovation as the regulators are hoping for? So basically this research question, how is antitrust intervention against the dominant firm related to innovation in the ecosystem? So what did we do? So just like the examples of Google we looked at in the beginning of today where Google was the dominant mobile platform also had its own apps like chrome that it was bundling with platform, again the Microsoft case in 2001 prominently refers to dominant platform blocking innovation. Innovation was the central motivator for this case. The point is that this case is an especially appropriate setting for us to study competition regulation and innovation. So quick visual of
the design, Microsoft is the dominant server platform that is being regulated around 2001, also had strongly competitive products in some of the complementor markets, two on the left, and then was not strong in three others. So we use this variation in data and argue that reducing Microsoft's competitive threat through the antitrust case should affect more strongly those complementor markets that are marked in red color and not so much where it was not much of a player which are marked in green color. So there are a lot of technical details. We use definitive analysis, various matching, synthetic controls, technical details, happy to answer any questions later if you are interested. Our data is a full population of public infrastructure software firms in the US. Typical of this sector, many of the firms are in the bay area. We also did interviewing in the sector to ground our analysis which was a fun part of this project. Now at this
point you may be wondering, they're interested in innovation that's the intent, how do you measure, how do you measure innovation? So we use patents, by the time of the case were standard in software. Also alternative measures, and we're also tracking profitability of these firms. So the statistical methods that I mentioned are pretty standard so let's move on to what we found. So what did we find? So we found big headline, when Microsoft was regulated, patenting innovation by complementors in our setting went way up while Microsoft's own patenting did not experience much change. So competition and antitrust seems to drive increases in innovation. The second result is that when Microsoft was regulated profits went down both complementors and Microsoft's own. And few visuals of these results, there are visuals of treated,
they are in red, and then actual control firms. So as expected we are seeing a huge increase in innovation of these red treated firms as we had expected and then the green firms are the control firms. We are using both synthetic controls. Here are the results on profits. So the results on profits are interesting. So reasoning is repositioning is costly even if we get more innovation there may be wasteful duplication. So it's harder to create profits and this indeed seems to be correct. Treated firms in red have slower profit growth after the case
using both actual firms, and then our synthetic control firms. So taking all results together innovation goes way up profits down and then we also analyzed Microsoft's case as well. So what did we learn through data that is potentially significant for antitrust decision makers? How do we contribute? For anti-trust regulation, our data suggests that intervention against a dominant platform can be effective. It boosts innovation for complimentors' apps' firms but profits are reduced at least in the short term. So overall our results suggest a potential social benefit to antitrust. Reduced competitive threat from a dominant platform spurs
innovation by other firms. But the big question is it creates this wild wild west situation where newly constrained dominant firms are less able to impose discipline that would potentially promote efficiency and reduce waste from duplication. So a final closing thought here is that if these ideas that sit in the intersection of innovation public policy and responsible and inclusive innovation resonate with you, please do get in touch with us at the Stanford Technology Ventures Program where we have launched a new PEAK initiative where we want to make sure that no student whose lives we touch at Stanford leave Stanford without having thought about questions that relate to social implications of their business decisions and their own ethical principles, whether their future businesses become powerful platforms or smaller perhaps more innovative complementors. So with that I'm happy to start answering any questions that you have. Okay thank you Riitta. And now it's on to our Q&A where our attendees have been submitting questions
throughout your session. So we have a few minutes for a couple questions. So the first one is, has Zoom become a dominant platform because of the use in school systems that has created a large user base? Can you repeat the question? Has Zoom become a dominant platform because of the use in school systems that has created a large user base? Oh has Zoom become, that's a very very interesting question and I wonder if the implication is should we be then regulating Zoom and would it bring more innovation? Very interesting questions. Certainly in the US, and so it's interesting, Europe seems to be using more Microsoft Teams. I would, we did not study that directly but that's a very interesting question. And then in the coming years are there implications for innovation,
very good question. Next question is could the graph on profits be confounded by the recession and dot com bust that started in 2000 and 2001? Excellent question. So we looked at this issue. So our reviewers of course are wondering about the same issue and it turns out that the results are not affected. So the case is a little bit after and our results actually should go in exactly the opposite direction that they are doing right now. But that's a really good question and that's a huge challenge in any kind of design that we're trying to use because there might be macroeconomic effects that are going on and influences that are going on at the same time, and so we had to carefully separate those effects. Excellent question. So the next question is, how about the cases where a dominant platform can bundle complementor's programs for free, trashes the complimenter's business by side swiping? Absolutely, so much of this anti-trust work has been around reduced or increased prices for consumers. And here we have a setting that
hasn't been much studied in organizations or strategy even in the econ field which really is around innovation. So the question of, much of these products are given out for free, and so the questions here are really around, and the antitrust arguments are around, innovation and not so much that these products might be more or less expensive for consumers. Again right on target, a very important question to think about. So I think we have time for one more question. As far as what was the long-term impact on consumers, did they eventually get better cheaper products? Excellent, so we were hoping that the platform ecosystem as a whole would benefit in the long term and perhaps because we are using smaller windows like three years before and after perhaps we have missed the long-term effects. So we extended the window after the antitrust case 10 years out and we're still getting the same results. So there isn't much profitability incentive for these firms and the ecosystem which is a big problem in the long term. So
exactly as you were asking, the question still remains even if we extended the observation window 10 years after the case the same results remain. We were hoping something that the question was asking that maybe the results would flip but they don't. Great thank you. So unfortunately that concludes our questions. Thank you Riitta for answering all those questions.