Absorption and envelopment by platforms

When a platform grows, it can absorb some of its users and envelop competitors. For example, compare AirBnB and Tujia, its Chinese competitor.

After a traveler and property owner connect on AirBnB, the property owner provides lodging for the traveler. AirBnB does not provide this service. It is not a property owner. But Tujia, the Chinese competitor to Airbnb, manages a large chunk of rental properties itself, which compete with the rental properties offered on Tujia by independent third parties [1].

And we have seen that Amazon Retail offers products that compete with products sold by third-party sellers on Amazon Marketplace.

Tujia and Amazon marketplace are connection platforms, but we see the same kind of cross-layer competition on utility platforms. Google provides the Google Play marketplace, and also provides several apps that run on Android, which compete with apps available in Google Play developed by third-party developers.

Absorption is the phenomenon that a platform competes with some of its users by offering the same products or services as these users. The platform not only offers an infrastructure for value adding services, it also absorbs some of these value-adding services itself.

The absorption examples given above are in the upward direction of the value model. Absorption may occur in the downward direction as well. For example, Google defines the Android standard, which is used by most smartphone manufacturers other than Apple. In addition, Google sells its own smartphone, the Pixel, which competes with other hardware providers.

The Chinese ride hailing provider Didi Chuxing has extended downwards too. It owns gas stations and auto repair shops to service cars owned by drivers that use the platform. So Didi owns several platforms used by the drivers, namely the interaction platform for ride hailing, the gas stations to serve its drivers, and the repair shops used by its drivers. In China this is called “going heavy” [2].

Absorption is a form of vertical integration because companies extend upwards and downwards across the stack of layers in a value network.

All of the examples of absorption given so far may be unfair, or at least unpleasant, for sellers, but they increase the choice of consumers. There are also examples of what we call destructive absorption, which lead to the reduction of consumer choice. For example, the platform Summify aggregated news from social networks and sent news digests to its users by email. This was a platform on top of Twitter and other social networks. In 2012, Twitter bought the platform and shut it down [3]. This is absorption too, not to compete with users but to stop a user with competing.

A related phenomenon to absorption is envelopment [4]. This is the process by which one platform adopts the functionality of another platform. Where absorption is a vertical integration process, envelopment is horizontal. For example, WeChat started out as a messaging platform but extended horizontally into an online marketplace, a payment platform, a ride hailing platform, a gaming platform and more [5]. Amazon Marketplace expanded into a pharmacy and is now expanding further into healthcare provision.

Platform absorption and envelopment have attracted the attention of anti-trust lawyers and regulators because it may lead to monopolies, a concentration of market power, and predatory pricing [6]. In the US, the EU and in China we now see regulators trying to find a new balance between ecosystem governance by a platform and by the state [7].

[1] (Lee, 2018) page 73.
[2] (Lee, 2018) page 71.
[3] “Summify”, Wikipedia, https://en.wikipedia.org/wiki/Summify.
[4] See (Eisenmann, et al., 2017).
[5]See Roel Wieringa, “The WeChat ecosystem business models,” The Value Engineers, 6th April 2021, https://www.thevalueengineers.nl/the-wechat-business-models/ and Roel Wieringa, “WeChat ecosystem governance,”19th April, 2021, https://www.thevalueengineers.nl/wechat-ecosystem-governance/.
[6] See (Kahn, 2017).
[7] Absorption is also called vertical integration. Lawgivers at different stages of introducing regulation that ensures fair competition. See European Commission, “The Digital Markets Act: ensuring fair and open digital markets,” https://ec.europa.eu/info/strategy/priorities-2019-2024/europe-fit-digital-age/digital-markets-act-ensuring-fair-and-open-digital-markets_en; House Committee on the Judiciary, “Judiciary antitrust committee investigation reveals digital economy highly concentrated, impacted by monopoly power,” October 6, 2020; Subcommittee on Antitrust, Commercial and Administrative Law of the Committee on the Judiciary. “Investigation of Competition in Digital Markets,” 2020, https://judiciary.house.gov/news/documentsingle.aspx?DocumentID=3429.