The monopolies of the internet

Across a huge range of internet activity there is one dominant firm: Facebook for social networking, Google for search, Twitter for micro-blogging, Amazon for books and so on.

The contrast between the presence of these dominating firms and the apparent ease of entry for new challengers is the subject of a piece by Tim Wu in the Wall Street Journal:

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.

What has happened to a free market of easy access to throw up this pattern of dominance? Wu points out the network effects that start to benefit the big firms at the expense of others. Why use Facebook? Because your friends are already on it.

Similar patterns of ‘to the victors, the spoils’ apply across many areas of internet activity, sometimes obvious and sometimes more subtle – such as the way Amazon’s dominance produces more reviews on the site, and hence more fresh, relevant content and so in turn better performance in search engines which in turn means more people use it, so more reviews and so on…

As Wu writes:

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 apparently firmly dominant do not always stay so, as the film Blade Runner reminds us. Made in 1982, it was set in a 2019 where large electronic adverts appear all over the place. The firms chosen in 1982 as plausible candidates for still being around in 2019 included some wise choices, such as Coca-Cola and Budweiser, but also included many which soon disappeared, such as Pan-Am, Bell and Atari.

Does this matter? Wu thinks so:

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 dazzling 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.

As he says, vigilance is necessary and some of those growing internet monopolies may yet become the centre of political and regulatory reforms in the way the monopolies of the late nineteenth and early twentieth centuries were in their time.

UPDATE A FEW YEARS ON: That’s one bit of punditry which has aged remarkably well.