European regulators have been proposing stricter rules for online platforms.LIONEL BONAVENTURE/AFP/Getty Images
Andreas Schotter is a professor of general management and international business at Western University’s Ivey Business School.
In the race to embrace digital innovation, Canadian businesses risk sacrificing their strategic autonomy to the influence of major tech platforms. Indeed, my latest research suggests a troubling paradox at the heart of our digital economy: The very platforms that promise growth and efficiency may be stifling the long-term competitiveness of the firms that depend on them.
As Canadian entrepreneurs increasingly rely on platforms such as Apple’s App Store or Amazon Marketplace, they gain access to vast customer bases and cutting-edge technologies. However, this digital opportunity comes with significant constraints. I would describe these constraints as a “Faustian Bargain,” where businesses trade long-term control over their strategic direction for the potential of rapid scaling in the short term.
This isn’t merely an academic concern. The European Union’s recent antitrust investigation into Apple’s App Store practices highlights the real-world consequences of platform dominance. Innovation and fair competition are at risk when a tech giant can dictate terms to its ecosystem of developers and merchants.
While big platforms strive to be innovators for consumers, they also act as puppet masters, pulling the strings of countless smaller companies. Through surveying global tech platforms and platform-dependent digital firms and an analysis of regulatory filings, my research shows three specific tactics that allow platform powerhouses to create a web of dependence that stifles true innovation and entrepreneurship.
First, they employ weak backward compatibility and mandatory updates. Take Apple’s iOS – updates are forced upon users and vendors alike, often rendering older apps useless. This “upgrade or die” mentality puts immense pressure on digital firms doing business on the platform.
Most of the 214 companies surveyed said that weekly updates are common. Some of the most dependent firms must employ anywhere from a few dozen to a couple of hundred programmers who focus on Apple App Store and Google Play Store compatibility. Aside from that large operating expense, the unpredictability of the form, and sometimes timing, of the major updates leaves also no room for independent innovation.
Second, powerful platforms enforce ecosystem exclusivity. Apple’s “walled garden” approach is a prime example. By restricting cross-platform compatibility, they force companies to develop exclusively for their ecosystem or face prohibitive costs. Epic Games learned this lesson the hard way when they dared to challenge Apple’s payment system monopoly. When Epic attempted to bypass Apple’s payment system to avoid the 30 per cent commission, Apple promptly removed Fortnite from the App Store.
Finally, Big Tech maintains an iron grip on scalability exploitation. While digital platforms offer unprecedented growth potential, companies like Google control the very APIs (the digital protocols) that enable this scalability. After companies have spent time and money to establish themselves on tech platforms, they are essentially stuck with them because the cost to move away and re-establish themselves is too much. The platforms can now change the game’s rules at any moment, forcing digital firms to dance to their tune or risk obsolescence.
This multifaceted dependence can profoundly shape a firm’s choices, creating a strategic straightjacket. Our research found that companies often shift from proactive innovation to reactive adaptation. Resources that could fuel groundbreaking innovations are instead squandered on keeping up with arbitrary platform changes. The digital economy promised democratization and opportunity, but instead we’re witnessing the rise of new, more insidious monopolies.
The implications extend beyond our borders. As these platforms expand globally, they’re reshaping markets and regulatory landscapes. In countries with less developed institutions, they often become de facto rule-setters. While this can bring short-term benefits in terms of economic development, it raises troubling questions about digital sovereignty and the long-term consequences for national economic autonomy.
Addressing these challenges requires a multifaceted approach from Canadian policy makers, starting with modernizing antitrust frameworks. We must look beyond traditional metrics to consider data control, network effects, and platforms’ indirect influences on innovation. Promoting interoperability and data portability can reduce lock-in effects and foster a more competitive ecosystem, potentially through legislation similar to the EU’s Digital Markets Act.
Enhancing digital literacy and skills training for businesses and entrepreneurs will enable them to navigate platform ecosystems more effectively. Targeted support programs can help small firms and startups diversify their digital presence and reduce over-reliance on single platforms.
Finally, implementing regulations that require major platforms to provide greater transparency about their algorithms, terms of service changes, and data usage will help businesses make more informed decisions and better anticipate potential risks in their platform partnerships.
The conveniences and opportunities offered by digital platforms are undeniable. However, as we embrace them, we must carefully consider the long-term implications for our digital sovereignty and economic competitiveness.