Riitta Katila: Innovation in a Time of Disruption

Riitta Katila: Innovation in a Time of Disruption

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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.

2021-03-23 00:42

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