By Christopher Mims
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."
(END) Dow Jones Newswires
May 31, 2018 12:39 ET (16:39 GMT)
Copyright (c) 2018 Dow Jones & Company, Inc.
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