https://www.wsj.com/articles/techs-titans-tiptoe-toward-monopoly-1527783845
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
Christopher MimsMay 31, 2018 12:24 p.m. ET
By
Christopher Mims
Imagine a not-too-distant future in which trustbusters force Facebook FB 1.15%
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. GOOGL 3.18% and Amazon.com Inc. AMZN
0.73% 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. AAPL 1.80% 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.”
Write to Christopher Mims at christopher.mims@xxxxxxx
