The Myth of High Tech Competition

When writing about antitrust in the Internet economy, you invariably run into people arguing something to the effect: "Well, antitrust was all well and good in the old industrial economy, but in new technology markets, competition is just a click away and new innovative competitors are appearing everyday."

Sounds compelling but it's just plain false.

The Radical Decline in Startups: The rise of the Internet has coincided with a drastic decline in new competitors emerging to challenge dominant firms.  A single player seems to dominate every silo of the internet, observed Pirate Bay founder Peter Sunde in a Wired Magazine interview just last week. "We are centralising everything on the internet." Google dominates search advertising, Facebook social networking, Skype videophone calls, Amazon online retailing.

Reflecting the dominance in these silos, most new small companies aren't looking to go public with an initial public offering (IPO), but instead are "cashing out" by getting acquired by existing big firms like Google, Amazon or Microsoft.   Where there were an average of 311 IPOs per year during the 1980-2000 era, researchers Xiaohui Gao, Jay R. Ritter and, Zhongyan Zhu found there were only 102 IPOs per year during 2001-2009; that's a decline of two-thirds and reflects what those researchers see as an economy where minnows don't grow up to challenge the big fish but are being eaten to fatten already existing dominant, often nearly monopolistic firms.   This is reflected in this graphic courtesy of Zero Hedge:




For smaller companies looking to go public, the IPO market has been even less active.  In 1999, there were 249 IPOs that raised between $5 million and $60 million from the market.  In 2012, there were just 12.  In an economy of superprofits for big Internet companies like Google and close to non-existent profits for smaller firms, it makes sense that most firms are looking to cash out through acquisition.   Snapchat may have made news by turning down a big buyout offer from Facebook to remain independent, but it's news precisely because of how unusual that choice has become, despite the handful of high-profile IPOs like Twitter and Linked In.

Few new firms are joining the ranks of top companies in the economy.   A 2010 Kaufman Foundation study found that four-fifths of the Fortune 500 came into existence before 1970, over forty years ago.    Firms created during the 1910s a century ago account for more firms in the Fortune 500 than firms created in either of the last two decades of the "Internet economy."  Recent high profile IPOs by Facebook and other recent tech firms can't disguise the fact that their revenues and employment figures don't even qualify as statistical blips in the economy.

Predatory Competition Among the Behemoths: Most tech-related revenue and employment remains with a handful of firms, from Google to Apple to Amazon to Microsoft to the much-scorned telecom companies (who still produce a disproportionate share of tech-related employment).  What competition that seems to exist is really only between that small batch of companies.   And the nature of that competition calls into doubt how effective even that can be in encouraging innovation and long-term competition.

Take Google, approaching fifteen years old, yet still the youngest of the major technology firms.  It completely dominates its core business of search-related advertising and it's ventures in other parts of the online economy, from video to email to e-commerce, are oriented less to making revenue in those sectors than collecting more user data to reinforce its monopoly in search advertising.    Other large tech companies have their own dominant sectors and usually venture into other product lines mostly to reinforce that core dominance, the prototypical example being Microsoft creating its own browser in the mid-1990s to reinforce its operating system monopoly.

Where these big firms meet in the market, the best example being the new tablet sector, it's very hard to see how any new firms have even a chance of competing.   Google is pushing out Android phones to maximize its collection of user data rather than maximize profits from tablet sales.  Amazon is involved in selling tablets at a loss or near breakeven point largely to drive users to its e-commerce offerings.  Microsoft has entered the market largely for the same reason it bothers to compete at a loss with Google in search engines--to protect its Windows operating system and productivity software as a standard for home and business use.  Only Apple's business model is primarily based on making profits based on its revenue from tablet sales directly.

And with Android phones making up 81 percent of phones being shipped in the last quarter, Google is clearly winning that competition, even as Apple may maintain its profitable niche as the other players pursue their own strategies.  No upstart company actually trying to deliver innovation in tablets or other sectors are likely to survive the predatory pricing strategies of these multi-sector behemoths.

Notably, two of Google's rivals in the tablet race, Microsoft and Apple, are approaching their fourth decade as companies and Amazon is still an elder brother, the most successful -- in many ways the only major survivor -- of the "Dot Com" meltdown of the 1990s.   No recent firm is even a player in the tablet market (Facebook's "Home" phone attempt was essentially a failure).

The Need for Tougher Antitrust Regulation: From a policy perspective, antitrust authorities and government regulators in general should recognize that the market is producing fewer likely challengers in the marketplace to keep dominant firms in check.   And once firms like Google become entrenched in a silo, it's even harder to displace them, making it incumbent on regulators to take action earlier in product cycles before any one firm has established its dominance.  Antitrust regulators checked Microsoft back in the 1990s when it was abusing its monopoly, opening the way for a Google to emerge in the online ecosystem, but so far regulators have been asleep at the switch in checking Google's own expanding online dominance.

Critics of regulation usually worry that it will undermine innovation, yet centralized business control of different silos is even more likely to discourage innovation or even attempts at innovation if challenge to that sector leader is impossible.  Small firms are too busy getting gobbled up by the monopolists to act as a check, so antitrust regulators need to get back on the job.