Tech’s Titans Tiptoe Toward Monopoly
Tech’s Titans Tiptoe Toward Monopoly
Amazon, Facebook and Google may be repeating the history
of steel, utility, rail and telegraph empires past—while Apple appears
vulnerable
By Christopher Mims May 31, 2018 12:24 p.m. ET
Imagine a not-too-distant future in which trustbusters
force Facebook to sell off Instagram and WhatsApp. Imagine a time when Amazon’s
cloud and delivery services are so dominant the company is broken up like
AT&T. Imagine Google’s search or YouTube becoming regulated monopolies,
like electricity and water.
Facebook Inc., Google parent Alphabet Inc. and Amazon.com
Inc. are enjoying profit margins, market dominance and clout that, according to
economists and historians, suggest they’re developing into a new category of
monopolists. They may not yet be ripe for such extreme regulatory action, but
as they consolidate control of their markets, negative consequences for
innovation and competition are becoming evident.
For example, some who study the past compare Amazon and
Facebook to Standard Oil, for their similar quests to vanquish competitors and
even their own suppliers through vertical integration.
Google, Facebook and Amazon also bear resemblance to
another monopolist of yore, the telegraph heavyweight Western Union, says
Richard du Boff, emeritus professor of economic history at Bryn Mawr.
“What [Western Union] was always engaged in was clearing
the field, getting rid of anybody who was in their way, either by takeover or
other means. The main motive, as I see it, was market domination.”
Experts aren’t, however, lumping in Apple Inc. with the
new monopolists. Like Microsoft Corp. and Intel Corp. before it, Apple is
considered more vulnerable to competitive disruption, despite the fact that it
tops the tech world in revenue, profit and market capitalization.
One way today’s monopolists are different from the robber
barons of old is that they’re not exactly behaving like, for example, Andrew
Carnegie, who turned armed guards on striking workers. And regulators don’t
particularly care if a company is a monopoly unless it harms the public or
hampers innovation. But on those counts, many argue we’re close. Take the way
both Google and Facebook dominate the harvesting of user data, or Facebook’s
ethically dubious decision to release vast quantities of personal information
to developers.
Facebook and Google
The reason your electricity comes from a regulated
monopoly is that building a grid is expensive, but pushing more electrons to
new customers is not. One condition for judging monopolies is how difficult it
is for upstarts to challenge them.
Together, Google and Facebook take in 73% of U.S. digital
advertising. It may not be something you think about often, but that success
rests largely on the fact that both have spent so much money building data
centers and filling them with hardware and software designed by an elite,
in-demand set of engineers. In this way they resemble the telegraph giants,
with investments in physical infrastructure so large no upstart could match
them.
They also benefit from something historically
unprecedented: the ability to get users to subsidize them with enormous
quantities of free labor. Their systems are fueled by personal information, but
instead of them hunting for it, people willingly provide it.
In addition, social media is a land grab, and Facebook is
its most successful grabber, says Glen Weyl, a senior research scholar at Yale
and a principal researcher at Microsoft Research, the company’s R&D lab. In
basic function, it’s hardly changed in a decade, yet it’s made enough money to
buy (Instagram, WhatsApp) or copy ( Twitter and Snapchat) its biggest
competitors.
There is preliminary evidence that the size of the
digital advertising pie could grow faster than Google’s and Facebook’s share of
it. Research company eMarketer projected in March that their combined share of
the ad market will fall for the first time ever.
“We face fierce competition as new technologies change
the way people connect,” says a spokeswoman for Facebook. “Facebook is just one
part of an ecosystem that includes dozens of messaging products, photo and video
sharing apps, and many other services. Popularity does not equal dominance, and
size is not a guarantee of future success.”
Amazon
Amazon, in its sprawl and ambition, illustrates what
monopolies look like in their early days, says Kim Wang, an assistant professor
of strategy and international business at Suffolk University’s Sawyer Business
School. Amazon seems determined to translate its dominance in cloud computing
and online retail into dominance in physical retail, delivery of goods,
voice-based computing and a half dozen other industries.
Amazon already accounts for 44% of U.S. e-commerce sales,
and is showing rapid growth in categories where it previously foundered, like
luxury goods and food. It’s convinced former competitors to get on board as
partners, is vertically integrating everything from ordering to delivery—and
could someday add manufacturing to the mix.
If Amazon’s rapid growth continues across all these lines
of business, it’s hard to imagine it not eventually becoming a target for breakup.
Jeff Wilke, Amazon’s chief of worldwide consumer
business, has said that in all the businesses it is in, Amazon has “incredible
competition.”
“In world-wide retail, we’re less than 1%,” he recently
told the Journal. “I don’t think any one of these areas is a football game
where there’s only one winner.”
Apple
While Apple may be hoovering up the lion’s share of the
mobile industry’s profits, the company is hardly a monopoly by measure of
overall market share, say experts.
A “network effect” is when a product becomes more useful
as more and more people use it—be it a fax machine or Facebook. For Apple, the
size of its customer base attracts developers who in turn make the iPhone and
iPad more valuable.
Microsoft once had a platform with similar dominance, and
it was thought that the network effects of its large customer base and
attractiveness to developers would help it stay dominant, says Catherine
Tucker, a professor of management and marketing at MIT Sloan School of
Management.
But we’ve got network effects all wrong, argues Dr.
Tucker, and we failed to realize that they’re just as likely to empower
upstarts to disrupt incumbents like Microsoft. Network effects helped
smartphones like the iPhone quickly gain popularity, which marginalized
Microsoft’s Office and Windows platforms.
Even Apple’s own iTunes takeover of the music industry
proved to be a passing trend, as Spotify and other streaming services moved in.
Early Days
Not everyone agrees that Facebook, Google or Amazon, as
powerful as they are now, will need to be reined in.
“Today’s Amazon is tomorrow’s Macy’s, ” says Dr. Wang.
“Very few companies will be able to position themselves for the new, next
technology every time.” The technology that gives firms an edge eventually
comes within reach of their competitors, she says.
In every monopoly-dominated industry in history, whether
it was oil, railroads, steel or utilities, even the most avaricious competitors
took decades to consolidate their hold on markets. Even at today’s faster pace,
it’s probably still early days for tech giants.
“Companies go one of two ways—some are in areas where
declining returns to scale set in and they get tamed by market processes,” says
Dr. Weyl. “And other companies get tamed by getting turned into a public
utility. And until they are, they reap extortionate profits.”
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