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In the Grip of the New Monopolists
Do away with Google? Break up Facebook? We can't imagine life without them—and that's the problem
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How hard would it be to go a week without Google? Or, to up the ante, without Facebook,
Amaz on, Skype, Twitter, Apple, eBay and Google? It wouldn't be impossible, but for even
a moderate Internet user, it would be a real pain. Forgoing Google and Amaz on is just
inconvenient; forgoing Facebook or Twitter means giving up whole categories of activity.
For most of us, avoiding the Internet's dominant firms would be a lot harder than bypassing
Starbucks, Wal- Mart or other companies that dominate some corner of what was once
called the real world.
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Apple Chief Executive Steve Jobs
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; Amaz on,
retail; and so on.
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There are digital Kashmirs, disputed
territories that remain anyone's game, like digital publishing. But the dominions of major
firms have enjoyed surprisingly secure borders over the last five years, their core markets
secure. Microsoft's Bing, launched last year by a giant with $40 billion in cash on hand, has
captured a mere 3.25% of query volume (Google retains 83%). Still, no one expects
Google Buz z to seriously encroach on Facebook's market, or, for that matter, Skype to
take over from Twitter. Though the border incursions do keep dominant firms on their toes,
they have largely foundered as business ventures.
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The rise of the app (a dedicated program
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The rise of the app (a dedicated program
that runs on a mobile device or Facebook)
may seem to challenge the neat sorting of
functions among a handful of firms, but
even this development is part of the larger
trend. To stay alive, all apps must secure a
place on a monopolist's platform, thus
strengthening the monopolist's market
dominance.
Today's Internet borders will probably
change eventually, especially as new
markets appear. But it's hard to avoid the
conclusion that we are living in an age of
large information monopolies. Could it be
that the free market on the Internet actually
tends toward monopolies? Could it even be
that demand, of all things, is actually
winnowing the online free market—that
Americans, so diverse and individualistic,
actually love these monopolies?
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The history of American information firms
suggests that the answer to both questions
is "yes." Over the long haul, competition
has been the exception, monopoly the rule. Apart from brief periods of openness created
by new inventions or antitrust breakups, every medium, starting with the telegraph, has
eventually proved to be a case study in monopoly. In fact, many of those firms are still
around, if not quite as powerful as they once were, including AT&T, Paramount and NBC.
Amaz on Chief Executive Jeff Bez os
Internet industries develop pretty much like any other industry that depends on a network: A
single firm can dominate the market if the product becomes more valuable to each user as
the number of users rises. Such networks have a natural tendency to grow, and that growth
leads to dominance. That was the key to Western Union's telegraph monopoly in the 19th
century and to the telephone monopoly of its successor, AT&T. The Bell lines simply
reached more people than anyone else's, so ever more customers came to depend on
them in a feedback loop of expanding market share. The more customers they reached,
the more impervious the firm became to challengers.
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Still, in a land where at least two mega- colas and two brands of diaper can duke it out
indefinitely, why are there so many single- firm information markets? The explanation would
seem to lie in the famous American preference for convenience. With networks, siz e brings
convenience.
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Consider that, in the late 1990s, there were
many competing search engines, like
Lycos, AltaVista and Bigfoot. In the 2000s,
there were many social networking sites,
including Friendster. 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 seiz ed so much as it is surrendered up, and that surrender is born less of a
deliberate decision than of going with the flow.
We wouldn't fret over monopoly so much if it came with a term limit. If Facebook's rule over
social networking were somehow restricted to, say, 10 years—or better, ended the moment
the firm lost its technical superiority—the very idea of monopoly might seem almost
wholesome. The problem is that dominant firms are like congressional incumbents and
African dictators: They rarely give up even when they are clearly past their prime. Facing
decline, they do everything possible to stay in power. And that's when the rest of us suffer.
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AT&T's near- absolute dominion over the telephone lasted from about 1914 until the 1984
breakup, all the while delaying the advent of lower prices and innovative technologies that
new entrants would eventually bring. The Hollywood studios took effective control of
American film in the 1930s, and even now, weakened versions of them remain in charge.
Information monopolies can have very long half- lives.
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Declining information monopolists often find
a lifeline of last resort in the form of Uncle
Sam. The government has conferred its
blessing on monopolies in information
industries with unusual frequency.
Sometimes this protection has yielded
reciprocal benefits, with the owner of an
information network offering the state
something valuable in return, like
warrantless wiretaps.
Google co- founder Sergey Brin
Essential to NBC, CBS and ABC's long
domination of broadcasting was the
government's protection of them first from FM radio (the networks were stuck on AM) and
later from the cable TV industry, which it suppressed for decades. Today, Veriz on and
AT&T's dominance of wireless phone service can be credited in part to de facto assistance
from the U.S., and consequently their niche is probably the safest in the entire industry.
Monopolies may be a natural development, but the most enduring ones are usually statesponsored. All the more so since no one has ever conceived a better way of scotching
competitors than to make them comply with complex federal regulation.
Info- monopolies tend to be good- to- great in the short term and bad- to- terrible in the long
term. For a time, firms deliver great conveniences, powerful efficiencies and daz z ling
innovations. That's why a young monopoly is often linked to a medium's golden age. Today,
a single search engine has made virtually everyone's life simpler and easier, just as a
single phone network did 100 years ago. Monopolies also generate enormous profits that
can be reinvested into expansion, research and even public projects: AT&T wired America
and invented the transistor; Google is scanning the world's libraries.
The downside shows up later, as the monopolist ages and the will to innovate is replaced
by mere will to power. In the 1930s, AT&T took the strangely Luddite measure of
suppressing its own invention of magnetic recording, for fear it would deter use of the
telephone. The costs of the monopoly are mostly borne by entrepreneurs and innovators.
Over the long run, the consequences afflict the public in more subtle ways, as what were
once highly dynamic parts of the economy begin to stagnate.
These negative effects are why people like Theodore Roosevelt, Louis Brandeis and
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Thurman Arnold regarded monopoly as an evil to be destroyed by the federal courts. They
took a rather literal reading of the Sherman Act, which states, "Every person who shall
monopoliz e…shall be deemed guilty of a felony." But today we don't have the heart to
euthaniz e a healthy firm like Facebook just because it's huge and happens to know more
about us than the IRS.
The Internet is still relatively young, and we remain in the golden age of these monopolists.
We can also take comfort from the fact that most of the Internet's giants profess an
awareness of their awesome powers and some sense of attendant duty to the public.
Perhaps if we're vigilant, we can prolong the benign phase of their rule. But let's not pretend
that we live in anything but an age of monopolies.
—Tim Wu is a professor at Columbia Law School. His new book is "The Master Switch: The
Rise and Fall of Information Empires."
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