Evaluating the free market by comparing it to the alternatives (We don't need more regulations, We don't need more price controls, No Socialism in the courtroom, Hey, White House, leave us all alone)
Tuesday, April 2, 2019
This Too Shall Pass: Unassailable Monopolies That Were, in Hindsight, Eminently Assailable
"[N]ew combinations are, as a rule,
embodied, as it were, in new firms which generally do not arise out of
the old ones but start producing beside them; … in general it is not the
owner of stagecoaches who builds railways. – Joseph Schumpeter, January 1934
Elizabeth Warren wants to break up
the tech giants — Facebook, Google, Amazon, and Apple — claiming they
have too much power and represent a danger to our democracy. As part of
our response to her proposal, we shared a couple of headlines from 2007 claiming that MySpace had an unassailable monopoly in the social media market.
Tommaso Valletti, the chief economist of the Directorate-General for Competition (DG COMP) of the European Commission, said,
in what we assume was a reference to our posts, “they go on and on with
that single example to claim that [Facebook] and [Google] are not a
problem 15 years later … That’s not what I would call an empirical
regularity.”
We appreciate the invitation to show that prematurely dubbing
companies “unassailable monopolies” is indeed an empirical regularity.
It’s Tough to Make Predictions, Especially About the Future of Competition in Tech
No one is immune to this phenomenon. Antitrust regulators often take a
static view of competition, failing to anticipate dynamic technological
forces that will upend market structure and competition.
Scientists and academics make a different kind of error. They are
driven by the need to satisfy their curiosity rather than shareholders.
Upon inventing a new technology or discovering a new scientific truth,
academics often fail to see the commercial implications of their
findings.
Maybe the titans of industry don’t make these kinds of mistakes
because they have skin in the game? The profit and loss statement is
certainly a merciless master. But it does not give CEOs the power of
premonition. Corporate executives hailed as visionaries in one era often
become blinded by their success, failing to see impending threats to
their company’s core value propositions.
Furthermore, it’s often hard as outside observers to tell after the fact whether business leaders just didn’t see a tidal wave
of disruption coming or, worse, they did see it coming and were unable
to steer their bureaucratic, slow-moving ships to safety. Either way,
the outcome is the same.
Here’s the pattern we observe over and over: extreme success in one
context makes it difficult to predict how and when the next paradigm
shift will occur in the market. Incumbents become less innovative as
they get lulled into stagnation by high profit margins in established
lines of business. (This is essentially the thesis of Clay Christensen’s
The Innovator’s Dilemma).
Even if the anti-tech populists are powerless to make predictions,
history does offer us some guidance about the future. We have seen time
and again that apparently unassailable monopolists are quite effectively
assailed by technological forces beyond their control.
Source: ComscoreMar 2000: Palm Pilot IPO’s at $53 billion
Sep 2006: “Everyone’s always asking me when Apple will come out with a
cellphone. My answer is, ‘Probably never.’” – David Pogue (NYT)
Apr 2007: “There’s no chance that the iPhone is going to get any significant market share.” Ballmer (USA TODAY)
Jun 2007: iPhone released
Nov 2007: “Nokia: One Billion Customers—Can Anyone Catch the Cell Phone King?” (Forbes)
Sep 2013: “Microsoft CEO Ballmer Bids Emotional Farewell to Wall Street” (Reuters)
If there’s one thing I regret,
there was a period in the early 2000s when we were so focused on what we
had to do around Windows that we weren’t able to redeploy talent to the
new device form factor called the phone.
Search
Source: Distilled Mar 1998: “How Yahoo! Won the Search Wars” (Fortune)
Once upon a time, Yahoo! was an
Internet search site with mediocre technology. Now it has a market cap
of $2.8 billion. Some people say it’s the next America Online.
AOL’s dominance of instant
messaging technology, the kind of real-time e-mail that also lets users
know when others are online, has emerged as a major concern of
regulators scrutinizing the company’s planned merger with Time Warner
Inc. (twx). Competitors to Instant Messenger, such as Microsoft Corp. (msft) and Yahoo! Inc. (yhoo), have been pressing the Federal Communications Commission to force AOL to make its services compatible with competitors’.
There have been isolated examples,
as in the case of obligations of the merged AOL / Time Warner to make
AOL Instant Messenger interoperable with competing messaging services. These obligations on AOL are widely viewed as having been a dismal failure.
Oct 2017: AOL shuts down AIM
Jan 2019: “Zuckerberg Plans to Integrate WhatsApp, Instagram and Facebook Messenger” (NYT)
Seventy percent of Yahoo 360
users, for example, also use other social networking sites — MySpace in
particular. Ditto for Facebook, Windows Live Spaces and Friendster …
This presents an obvious, long-term business challenge to the
competitors. If they cannot build up a large base of unique users, they
will always be on MySpace’s periphery.
Feb 2007: “Will Myspace Ever Lose Its Monopoly?” (Guardian)
Jun 2011: “Myspace Sold for $35m in Spectacular Fall from $12bn Heyday” (Guardian)
Music
Source: RIAADec 2003: “The subscription model of buying music is bankrupt. I
think you could make available the Second Coming in a subscription
model, and it might not be successful.” – Steve Jobs (Rolling Stone)
Apr 2006: Spotify founded
Jul 2009: “Apple’s iPhone and iPod Monopolies Must Go” (PC World)
Jun 2015: Apple Music announced
Predicting the future of competition in the tech industry is such a fraught endeavor that even articles about how hard it is to make predictions include incorrect predictions. The authors just cannot help themselves. A March 2012 BBC article “The Future of Technology… Who Knows?” derided the naysayers who predicted doom for Apple’s retail store strategy. Its kicker?
And that is why when you read that
the Blackberry is doomed, or that Microsoft will never make an
impression on mobile phones, or that Apple will soon dominate the
connected TV market, you need to take it all with a pinch of salt.
But Blackberry was doomed and Microsoft never made an impression on mobile phones. (Half credit for Apple TV, which currently has a 15% market share).
Nobel Prize-winning economist Paul Krugman wrote a piece
for Red Herring magazine (seriously) in June 1998 with the title “Why
most economists’ predictions are wrong.” Headline-be-damned, near the
end of the article he made the following prediction:
The growth of the Internet will
slow drastically, as the flaw in “Metcalfe’s law”—which states that the
number of potential connections in a network is proportional to the
square of the number of participants—becomes apparent: most people have
nothing to say to each other! By 2005 or so, it will become clear that
the Internet’s impact on the economy has been no greater than the fax
machine’s.
Robert Metcalfe himself predicted in a 1995 column
that the Internet would “go spectacularly supernova and in 1996
catastrophically collapse.” After pledging to “eat his words” if the
prediction did not come true, “in front of an audience, he put that
particular column into a blender, poured in some water, and proceeded to
eat the resulting frappe with a spoon.”
A Change Is Gonna Come
Benedict Evans, a venture capitalist at Andreessen Horowitz, has the best summary of why competition in tech is especially difficult to predict:
IBM, Microsoft and Nokia were not
beaten by companies doing what they did, but better. They were beaten by
companies that moved the playing field and made their core competitive
assets irrelevant. The same will apply to Facebook (and Google, Amazon
and Apple).
Elsewhere, Evans tried to reassure his audience that we will not be stuck with the current crop of tech giants forever:
With each cycle in tech, companies
find ways to build a moat and make a monopoly. Then people look at the
moat and think it’s invulnerable. They’re generally right. IBM still
dominates mainframes and Microsoft still dominates PC operating systems
and productivity software. But… It’s not that someone works out how to
cross the moat. It’s that the castle becomes irrelevant. IBM didn’t lose
mainframes and Microsoft didn’t lose PC operating systems. Instead,
those stopped being ways to dominate tech. PCs made IBM just another big
tech company. Mobile and the web made Microsoft just another big tech
company. This will happen to Google or Amazon as well. Unless you think
tech progress is over and there’ll be no more cycles … It is
deeply counter-intuitive to say ‘something we cannot predict is certain
to happen’. But this is nonetheless what’s happened to overturn pretty
much every tech monopoly so far.
If this time is different — or if there are more false negatives than
false positives in the monopoly prediction game — then the advocates
for breaking up Big Tech should try to make that argument instead of
falling back on “big is bad” rhetoric. As for us, we’ll bet that we have
not yet reached the end of history — tech progress is far from over."
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