Meta, Twitter, Uber, Deliveroo, Netflix: “The platform economy is at the end of its shutdown” – Economic Policy
The technology sector is collapsing. “We’re reaching the end of what they can use in terms of the network effect,” says Paul Belleflamme, professor of economics at UCLouvain. These companies need to reinvent themselves.
Paul Belleflamme is a professor of economics at UCLouvain and an expert on platforms. He analyzes for Trends Tendances the major turning point of the moment for the web giants, which are facing a major crisis with loss of value and plans for layoffs.
Paul Belleflamme is a professor of economics at UCLouvain and an expert on platforms. He analyzes for Trends Tendances the major turning point of the moment for the web giants, which are facing a major crisis with loss of value and plans for layoffs. Are we witnessing a turning point for GAFAM? What is certain is that they are all picking up, for now. The technology sector performed well, with the Nasdaq down 30% and the Dow Jones down 10% over the past two months. That’s why the biggest losers are on the side of tech firms. Everyone is suffering from inflation, rising interest rates, reduced household spending on less essentials, especially subscriptions: this partly explains why these companies are more affected than others. Free templates are affected by the decline of advertising, where Meta is perhaps more affected than others, especially if there is no love from the public. Unlike Apple and Google, Meta does not have its own entry point, relying on the goodwill of others to access its application. That’s its big problem. But isn’t there a more general problem with the economic model? It certainly is, and we should be talking about all platforms, including Uber, Deliveroo, Spotify, Netflix and others, not just GAFAM. We understand that they have reached a little bit of the goal that they can use in terms of network effect. The network effect is the idea that a platform becomes more and more attractive as it has users. It also allows you to have more content to exchange to Meta or Netflix, creating custom content. For Uber, this makes it possible to have more drivers and offer better service to passengers by reducing waiting times. This also explains their strong growth, with income that takes time to achieve, even if it requires large investments at the beginning. But over time, this network effect brings lower and lower income for companies. Because growth is not infinite? This is the first. point. But beyond that, the first users we can attract have more value than those who come later. There comes a time when the positive effects of this growth in the network diminishes. Underperformance, really? Exactly. This is the marginal effect calculated in economics. The contribution of the end user is getting weaker and weaker. This is as true for Uber as it is for Netflix. and it remains an uncertain task: although we know the average taste of users, enabled by the increasing number of available data, the fact remains that the success of a TV series or a movie is uncertain. , too many requests…? When we do a little introspection, we have to realize that we are also a little tired of this model. Because there are a lot of requests, it’s true, but also because we pay one way or another, and we’re becoming more and more sensitive to the use of our data… These companies are also getting bigger and bigger, which we really don’t like, we’re afraid they’re everywhere. No one will feel sorry for the idea of breaking their face a little. Is there a generational effect? In the meta case, yes: Facebook is a social network for older people, young people prefer TikTok. It is also an example of falling barriers to entry. There are barriers created by the mass of consumers that there are already established firms and it is difficult to move an entire group. If we migrate alone, we will lose the influence of those gathered. But in the case of TikTok, it’s a new generation of users who have taken it over. In addition, technology has become more democratic and business models are well known. Launching a platform is still complicated, but consumers are getting used to it making it easier to launch than it was a decade ago. So are we moving towards a greater diversity of platforms? It’s getting easier today to get banderillas decorated by competitors. The doors are opening for new platforms with similar business models but with a slightly different approach. That is, there is simply less cash, and the strategy of endless inflation in the hope of dominating the market and gaining a dominant position is no longer so obvious. One last point to consider: regulators are becoming more and more important. As we say in football, pressing is more and more important. The consequences of all this are significant for employment: 45,000 jobs were lost last year, and the current plans to cut jobs from Meta and Twitter are still fueling this trend; A quick word on Twitter: Elon Musk’s takeover is changing the model, even aiming to turn it into a political tool. It’s also a significant development, isn’t it?.. It’s definitely a strong development for a company to be bought by an individual and no longer listed on the stock exchange. On the meta side, it’s Zuckerberg who makes all the decisions, a form of human dependency without outside control. They have shown themselves to be enlightened businessmen, but perhaps have a form of megalomania that can be harmful. The future of these companies may depend on the mood of their leaders. Going back to Elon Musk and Twitter, it’s hard to understand because he’s been mired in an impossible quagmire by paying what everyone considers exorbitant. This is an unprofitable business, and it is difficult to see how it can be profitable. He wants to make things profitable, but one of the risks with such a network is that if it works well when it swells quickly, it can lose everything when all the rats get off the boat. It can go very quickly one way or another. However, we are only willing to pay if there is a lot of content and therefore users. It’s hard to find balance when there’s no one left. The technology that makes it all work is content moderation, an extremely complex task that everyone struggles with. Also, there is no more control, freedom of expression is the best way… so that there is no more freedom of expression, rather. Everyone is at risk of breaking away from a universe that is no longer in control; Moreover, when Elon Musk announces that he will vote for the Republican Party, he risks turning the network into a political tool… Everyone is entitled to their political position. from a purely business perspective, if Elon Musk directs content in a certain way, it is expected that users will agree with him, as Trump does on his social network. But maintaining Twitter’s current user base with a controlled freedom of speech, everything and nothing, is extremely important to advertisers who certainly don’t want to partner with hateful content. They may be the first to leave. It can be a vicious cycle, especially if users leave in droves.Is it hard to reinvent the model? Meta has invested heavily in its virtual universe, with no success so far… It really doesn’t take the sauce. Having their own Metaverse, they will control their own entry points. But this is not the most convenient: to use a virtual helmet, you need about 9 m2 more or less free, which means great technical limitations in addition to the investment for the user. It’s hard to see how this could develop with the current state of technology. Is this the end of the US-dominated world? I don’t know, I don’t believe these companies will disappear. a significant value, all the same. It’s all about finding a new cruise speed that works. However, this shows that they are rather dull models, as the sources of income depend mainly on interdependence between users.