'“Digital Colonization” of Highly Regulated Industries: An Analysis of Big Tech Platforms’ Entry into Health Care and Education' by Hakan Ozalp, Pinar Ozcan, Dize Dinckol, Markos Zachariadis and Annabelle Gawer in (2024) 64(4) California Management Review comments
Digital platforms have disrupted many sectors but have not yet visibly transformed highly regulated industries. This study of Big Tech entry in healthcare and education explores how platforms have begun to enter highly regulated industries systematically and effectively. It presents a four-stage process model of platform entry, which we term as “digital colonization.” This involves provision of data infrastructure services to regulated incumbents; data capture in the highly regulated industry; provision of data-driven insights; and design and commercialization of new products and services. The article clarifies platforms’ sources of competitive advantage in highly regulated industries and concludes with managerial and policy recommendations.
Over the past few years, digital platforms have disrupted competition and innovation across many sectors, including retail, entertainment, hospitality, transportation, gaming, and music. Platform firms are now dominating the list of biggest firms by market capitalization, often referred to as “Big Tech” players. Recently, the prevalence of digital platforms has further increased in various industries as the COVID-19 pandemic amplified the role of digital services in people’s lives, reshaping customer habits from how they shop, work, and entertain while skyrocketing the revenues of digital platforms. These Big Tech firms are under scrutiny regarding how much value they return to end customers as they acquire, analyze, and take advantage of their data to boost profits and influence markets.
While platform firms have now become prevalent in many industries, highly regulated industries such as healthcare and education had lagged behind until recently, but there are clear signs that this has started to change. Considering these changes, we explore the entry paths of Big Tech platforms (more specifically Google (Alphabet), Amazon, Facebook (Meta), Apple, and Microsoft, also known as GAFAM) into highly regulated industries by looking at the prominent examples of healthcare and education in the context of the United States and United Kingdom, where they have been most active in these industries so far.
The Platform Business Model and the Role of Data
A platform creates value thanks to its advantages in connecting different users through enhanced matchmaking and facilitating transactions among them (e.g., by connecting customers and complementors). Platforms can achieve rapid growth through highly scalable technological intermediation and reduction of various costs for transacting, matching, and innovating. Platform growth is further fueled by network effects, and this mechanism underpins how the value a user receives from a platform increases with each new user on the same side of the platform (i.e., direct network effects) and the other side of the platform (i.e., indirect network effects). More recently, there has also been the growing importance of data network effects, which refer to the increasing value users obtain from the platform in parallel with the amount of data the platform accumulates, such as better recommendations on Netflix. Thanks to their digital nature, platforms can connect various platform sides via digital interfaces4 and, in the process, accumulate/leverage external resources (i.e., data) to develop relevant capabilities (i.e., algorithm-driven data analysis) to improve further and expand their offering.
Due to their digital properties, use of data, and platform business models, certain technology companies have rapidly grown, becoming some of the largest and most influential firms globally (see Figure 1 for Big Tech firms’ market caps). Big Tech firms started out as platforms with a single and focused intermediation activity (e.g., search engine). From there, they grew significantly in scope and entered new industries. Initially, they typically expanded into the space of their own complementors within their platform ecosystems (e.g., AmazonBasics competing with its own third-party sellers). Following this, they have entered related or adjacent sectors (e.g., Facebook acquisition of Instagram) or what may at first seem to be unrelated markets (e.g., Google acquisition of Waymo). ...
Data sit at the heart of every digital platform. As such, the main logic underpinning the various market segment entries by platforms seems to aim to maximize data collection; enhance data network effects that they have already built across industries7 to create more value; apply their data analysis capabilities; and take precedence over existing firms while improving products/services for consumers.
This data-centric approach to platform growth and industry entry, however, regularly raises questions on data privacy, fair competition, and the balance of value creation and value capture in industries where platforms enter. These issues become even more critical in highly regulated industries where value creation becomes extremely important (e.g., patient lives saved by new technologies), and concerns around data privacy and fair competition are even more salient (e.g., medical or learning records already used by Google and others).
Platforms in Highly Regulated Industries
Despite the penetration and dominance of digital platforms in several industries, highly regulated sectors such as education, energy, finance, and healthcare appeared to have been left behind9 due to high regulatory control creating barriers to entry for platforms. Highly regulated industries typically have high entry barriers and high operational and compliance costs, as visible from the various regulations for the healthcare and education industries in Table 1. Compared with other industries where regulatory interventions are typically “lighter” (e.g., taxi and transportation services), industries such as healthcare and education are characterized by the heavy involvement of state and government actors. This is mainly because of the crucial strategic role these industries play in ensuring social welfare and boosting the country’s economic growth and development, but also due to the associated social ramifications in terms of access, fairness, equality, privacy, and data sensitivity, as these factors directly tie to human and constitutional rights (e.g., “right to education”). Such state-controlled apparati, in addition to imposing a large set of rules and procedures upon private firms, often leave limited room for private actors to operate in, which presents a distinct challenge to market entrants. ...
Then, there is the thorny issue of data. Prospective digital platform entrants require data to develop new products or services, which calls for different strategies in highly regulated industries due to the need to capture and process sensitive personal data. If leaked or misused, such data can cause harm to individuals—for example, biometric data, genetic data, health-related data, race, or ethnicity data (typically held by healthcare providers), religious or philosophical beliefs (typically expressed in the context of education and recorded in essays, online educational platform discussions, and so on), and student education records. This tends to raise the level of regulation further, thus exacerbating inhibition of new entry. Due to such considerations, digital platforms have, until recently, mostly been absent from highly regulated industries. However, this is changing. Despite the challenges noted above, we observe that Big Tech firms are expanding their platforms into some of these highly regulated industries. Recent examples include Amazon acquiring U.S. online pharmacy Pillpack, Alphabet-Google partnering with the United Kingdom’s National Health Service (NHS) for data sharing and developing AI-powered healthcare services, and U.S. universities partnering with Amazon to install Alexa in the dormitories and elsewhere. In 2020, the COVID-19 pandemic accelerated this trend further by causing the emergence of new initiatives. Examples include Google’s subsidiary Verily offering COVID-19 testing and tracing, Google and Apple cooperating on mobile operating systems for COVID-19 contact tracing, Google Education expanding to support remote education, and Amazon offering COVID-19-specific Amazon Web Services (AWS) solutions for hospitals and research institutes.
Building on these trends, this article explores how Big Tech platforms enter and compete in highly regulated industries. Focusing on healthcare and education industries, we identify an entry pattern for these digital platforms, in which they typically begin as suppliers of data-infrastructure services to incumbents in the first phase. As incumbent service providers such as hospitals, schools, healthcare conglomerates typically lack capabilities in data management, they contract out these activities to Big Tech firms as technology service providers, aiming to reduce costs and improve services. In the second phase, Big Techs leverage their existing relationships as well as their data analysis capabilities (which they use to produce data-driven insights) to get access to the data already held by incumbent service providers. This indirect data capture (e.g., access to already collected data in a hospital), which they combine with their own direct data capture activities (e.g., through proprietary hardware such as Apple Watch, Google Tablet), then becomes an essential component of Big Tech firms’ entry pathway into the targeted highly regulated industry. As Big Tech firms combine the data they captured directly and indirectly, they can provide superior data-driven insights, which can add significant value to incumbent service providers (e.g., through saved lives, better learning outcomes, and lower costs). We find that a final component of entry for Big Tech firms is the design and commercialization of new products and services for the highly regulated industry target, where they may end up competing with their former clients over time.
Overall, our research suggests that Big Tech entry in highly regulated industries occurs via a process that we name “digital colonization,” which we specify as composed of four stages: provision of data infrastructure services to incumbents; direct and indirect data capture in industry; provision of data-driven insights; and design and commercialization of new products and services. While Big Tech firms rarely end up directly offering the “primary service” (e.g., providing school education or becoming primary healthcare providers) in highly regulated industries, they change the power dynamics in these industries over time by commoditizing incumbent service providers, turning them into mere complementors while Big Tech firms control the data and become unique providers of critical, data-driven value.