Does the Internet tend towards natural monoplies? Columbia Law professor Tim Wu makes a strong argument that it does in an Op-Ed in this weekend’s Wall Street Journal. While there is plenty of diversity on the Internet and few barriers to setting up shop, he points out that category after category is dominated by a single firm: Google, Facebook, Amazon, Skype, Twitter, Apple, and eBay.
Wu writes:
The Internet has long been held up as a model for what the free market is supposed to look like—competition in its purest form. So why does it look increasingly like a Monopoly board? Most of the major sectors today are controlled by one dominant company or an oligopoly. Google “owns” search; Facebook, social networking; eBay rules auctions; Apple dominates online content delivery; Amazon, retail; and so on.
If you define a market narrowly enough, it is easy to make any company look like a monopoly. But let’s concede that the Internet creates a lot of winner-take-most, if not a winner-take-all, situations. (A company can effectively have monopoly power without technically owning 100 percent of the market). The bigger question is: How durable are information monopolies on the Internet?
The same factor that gives rise to these monopolies so fast can prove to be their undoing: the lack of friction. Switching costs are almost nonexistent for most products on the Internet. Every single competing product or service is literally just a click away.
If there is one thing that locks us in, it is ourselves. It is the network effects at play across the Internet which help build up these natural monopolies faster than they otherwise would. Wu makes a deliberate point of this:
It was we, collectively, who made Google and Facebook dominant. The biggest sites were faster, better and easier to use than their competitors, and the benefits only grew as more users signed on. But all of those individually rational decisions to sign on to the same sites yielded a result that no one desires in principle—a world with fewer options.
Every time we follow the leader for ostensibly good reasons, the consequence is a narrowing of our choices. This is an important principle of information economics: Market power is rarely seized so much as it is surrendered up, and that surrender is born less of a deliberate decision than of going with the flow.
The more people who use Google’s search, the better it becomes; the more people on Facebook, the more you need to be on it too; the more people who sell on eBay, the more buyers it attracts, and so on.
Certainly information monopolies do exist and can persist. Look at Microsoft’s everlasting hold on desktop operating systems. But the half-life of market domination seems to be dwindling. AT&T ruled for 70 years, Microsoft ruled for maybe 25, so far Google has ruled for 10. Will Facebook rule next, and of so, for how long?
Monopoly is a big, bad, evil word, but not all monopolies are bad. One of the main reasons monopolies were regulated in the first place was because of their pricing power, but today’s information monopolies provide many of their services for free. It’s hard to argue consumer harm when consumers either aren’t paying much or are paying very little. (Amazon, for instance, maintains its dominant position in ecommerce through low prices). Many information monopolies today are more interested in collecting our data than taking our money.
The stronger argument is that information monopolies discourage competition, and that ultimately will limit choice and innovation. Look at search. You’d have to be crazy (or Blekko) to launch a search startup today and try to go up against Google.
But that brings us back to the durability issue. If Google’s power is transitory because it missed the boat on social, then does it really matter whether it holds near-monopoly power in search? While it is a good idea to remain vigilant against the rise of any information monopolies, the Internet will keep moving faster than the law or regulations can keep up.
Update: I asked Tim Wu how durable he thinks these information monopolies will be, and he agrees, “That’s the big question. Unfortunately my paragraphs on that question were deleted from the piece.” Here are those paragraphs the Wall Street Journal didn’t want you to read:
Are today’s internet monopolies really comparable to the info monopolies of other ages, like AT&T, the Hollywood studios, and NBC? Informed by the apostle of creative destruction Joseph Schumpeter, some agree that Internet monopolies are inevitable, but insists also that they are also inherently vulnerable and ephemeral. Just wait and today’s monopolies will be reshaped or destroyed by disruptive market forces. Bing may have had a slow start, but it may still run over Google, and if not, perhaps the rise of mobile Apps will make search engines irrelevant altogether. The theory is based, in part, on an inescapeable truth: all things change.
It is possible that we are living with a free market a very different kind than that envisioned by Adam Smith. He believed that a free market would mean many firms competing to sell their product at the lower price. It is a vision of successive industrial empires who stay in power only as long as they enjoy Heaven’s mandate. And indeed if, say, Facebook’s rule over any social networking were somehow limited to, say, 10 years, or better, ended the moment the firm lost its technical superiority, the very idea of monopoly might seem quite wholesome.
Exactly.
Photo credit: Flickr/ Chris Smart