Digital monopolies dominate the web

15 Nov 2010

In the golden age of the old PTTs (which was virtually all of the last century), their dominance of all things telecom was explained away as a “natural monopoly”.

Free marketers were laughed away on the grounds that building a rival network was wasteful, unnecessary - “un-natural” even.

The telcos are fading but new quasi-monopolies are emerging to take their place.

In a new book (TheMaster Switch: The Rise and Fall of Information Empires) law professor Tim Wu argues that information industries have always been dominated by oligopolies.

AT&T was the sole telco for 70 years until its court-ordered breakup in 1984 – a “natural monopoly” built out of ownership of the infrastructure.

But even without a physical network, Hollywood has been the prime channel to the movie market since the 1920s and the big TV networks still dominate television.

Now each internet sector is dominated by one or two firms.

“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,” Wu writes in a column in WSJ.

“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.”

He thinks consumers tacitly allow this because of their preference for convenience.

I’d argue that in digital markets there’s no room for second or third. If there’s one excellent search engine or online store, who needs another?

In the cases of social media, the network effect really matters. Facebook and Twitter are de facto – yes, “natural” – monopolies.

Wu, who coined the phrase “network neutrality,” believes web monopolies are likely though not necessarily inevitable. Much depends on the attitude of users, governments and regulators.

“So I think if people want to, we can maintain a greater openness, but it’s unclear if Americans really want that,” Wu said in an interview with the NY Times.

He says monopolies tend to be good to great in the first ten years. Only after that they become more interested in maintaining their market position.

“AT&T became dangerous when they began to suppress technologies that might threaten their rule,” Wu notes.

Ma Bell invented tape recording technology in the 1920s and then suppressed it because they believed that it would “lead to the abandonment of the telephone.”

Which is why monopolies are a bad thing: there’s nothing to stop them imposing their foolishness on the rest of us.

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