The Canadian government has launched its $4 billion Canada Digital Adoption Program (CDAP) to help small- and medium-sized businesses (SMBs) adopt new e-commerce tools and grow their online presence. While CDAP is welcome, simply getting more players online will not be enough to compete in digital markets distorted by the anti-competitive behaviour of Silicon Valley tech giants.
Businesses with a stand-alone website – a digital presence outside of social media – were once the bedrock of the open internet. The internet and World Wide Web were sold to the public on promises of openness and permission-less innovation. The internet, through open standards and easy connectivity, presented an opportunity for a new realization of the core tenants of liberal democracy – freedom of expression, equality and the free market.
But in 2022, the once-level playing field of a decentralized, open internet is tilted in favour of centralized big tech platforms. There’s now a fundamental imbalance in the online experience for both users and retailers. In Canada, Meta and Google capture four-fifths of the online advertising market, driving up digital ad costs for SMBs.
During the pandemic, reliance on digital shopping became obvious, with 52 per cent of Canadians saying they increased how much they spent on online shopping platforms like Amazon during the pandemic. Only 12 per cent of Canadians supported local small businesses.
If the idyllic internet of the 1990s was notable for the competition between infrastructure, ideas and businesses, the internet of today is marked by highly concentrated, powerful platforms.
Much has been said about the harms that platforms cause individuals, democracies and society writ large. But, in Canada, we’re seeing a new wave of interest in how the “platformization” of the internet and the anti-competitive behaviour it enables have harmed SMBs.
One practice highlighted in the Competition Bureau’s investigation into Amazon’s potential abuses of dominance is self-preferencing. This is the act of favouring one’s own products over those of its competitors on a platform that is open to other companies’ products. Amazon is often accused of this practice. People venturing onto Amazon’s marketplace will find Amazon’s own products at lower prices and more prominently displayed than the products of SMBs.
The Markup analyzed search results on Amazon for different products and found that in 60 per cent of cases, Amazon sold the first spot to advertisers. In sum, Amazon prioritizes its own products, and forces its marketplace competitors, predominantly SMBs, to pay for advertising in order to get the first spot on its platform so they can have similar odds of making a sale.
Self-preferencing is not unique to digital-first tech companies like Amazon. For example, grocery giant Loblaws – with the highest market share in Canada – prioritizes its private-label brands online. As traditional brick-and-mortar retailers move online, dominant firms exercise their market power through self-preferencing. SMBs will need protection from this digital anti-competitive behaviour as well.
Self-preferencing is one of many behaviours that harm SMBs. A study prepared for Innovation, Science and Economic Development Canada found that data use creates and entrenches significant market dominance in a way that is not well captured under the current Competition Act.
Platforms now use data they collect on consumers to identify which products are most popular and replicate them. This copycat behaviour becomes especially problematic when combined with self-preferencing. How is a small business supposed to thrive online when a tech giant knocks off its product and uses its power to prioritize its own version on its own platform?
For SMBs, big tech acts as both a fierce competitor and key infrastructure provider for sales, distribution and communications. They then take on the role of gatekeeper critical to the success of SMBs. For example, many SMBs rely on Meta’s suite of apps — Facebook, Instagram, and WhatsApp — to communicate with, and advertise to, onsumers.
Most Canadians spend time online using these apps. Some businesses rely exclusively on these platforms, leaving them susceptible to sudden changes in terms of service, or operations, such as the massive Facebook outage in 2021.
As well, developers who want access to iPhone and Android users must comply with Apple and Google’s terms of service. Apple’s dominance enables it to charge up to 30 per cent commission from in-app sales and prevents the use of external payment processors.
In Canada, a window of opportunity to do right by SMBs is opening. Spending money to help companies innovate online requires access to fair markets to be truly effective.
The global antitrust movement has been growing and is making its way to Canada. We’ve seen this in Senator Howard Wetston’s consultation on how to reform competition policy for the digital age. The Competition Bureau’s submission highlights how the digital economy changes the competition landscape. Currently, the penalties are too small to deter big tech and the scope of anti-competitive behaviour subject to review is not suitable for the digital economy.
The Trudeau government announced a two-step plan for competition policy in Canada which will include a comprehensive modernization of the Competition Act. The Act was last reviewed in 2008 when Meta (Facebook) only had 100 million users, as opposed to nearly three billion now.
Competition reform is essential to help SMBs compete fairly. Governments have a responsibility to create the conditions for economic success. Thankfully, there are many specific proposals for competition reform in Canada that can help transition the environment for SMBs from surviving to succeeding online. Transparency into how big tech companies operate the way they do, and the data they use to sustain their business operations, will play a key role in any attempt to level the playing field.
Simply being online isn’t enough for small businesses to thrive. Creating fairer markets and re-calibrating the balance between big tech and Canadian SMBs is crucial. A modernization of the Competition Act should ensure that digital markets provide a level playing field for new startups, business models, products and companies of all sizes to compete effectively online. Otherwise, efforts like CDAP to support SMBs online may be in vain.