Modern Monopolies are Good
Yesterday was a great day.
I got called a “knucklehead” on national television by Cory Johnson (Bloomberg TV anchor) for educating him on how technology is disrupting the 21st century. I love Bloomberg and they have very smart people working there like Pimm Foxx. Unfortunately, Cory’s familiarity with the differences between platforms and linear businesses and why tech platforms are modern monopolies is lacking.
Full video here: http://www.bloomberg.com/news/videos/2016-06-01/applico-ceo-monopolies-aren-t-always-a-bad-thing
Cory argued that monopolies are bad because they stifle competition and therefore take advantage of their customers like AT&T forcing customers to use the same corded telephones for decades. This isn’t the case with modern monopolies. Platforms have a fundamentally different business model and don’t deserve the same negative connotations associated with linear monopolies from the 20th and 19th centuries. Here’s why.
“When platforms are at war, consumers and producers win.”
As I was arguing in favor of modern monopolies, Cory interrupted to reinforce his point that monopolies, including modern platform monopolies, stifle competition and take advantage of their customers. His example? Uber.
Uber is a platform and well on its way to modern monopoly status, but it’s not taking advantage of its consumers or producers. Their $3.5 billion dollar fundraising round will be used to subsidize value to its consumers and producers (drivers) so it can continue to grow and dominate its markets. Every platform experiences this challenge. We call it the chicken and egg problem. All 7 strategies to overcome this challenge involve subsidies to one or both sides of a platform’s ecosystem. Think about Uber giving away free and discounted rides, especially like on this most recent Memorial Day weekend, or $1,000 bonuses to refer a driver, guaranteed earnings for new drivers of $6,000/month in their first 6 months on the platform.
“It takes platforms 10–15 years to become a modern monopoly.”
That means consumers and producers have a lot of time to reap the benefits of platforms warring for their loyalty and repeat usage. YouTube is still not profitable in Year 12 even after having Google’s backing and rock bottom hosting costs. Uber’s losing a $1 billion a year in China alone and was founded in 2009. Or, Amazon making its highest profit in 22 years at $596 million in Net Income off of over $107 billion in revenue.
“Modern Monopolies are always at war because they don’t own their supply chain.”
Even after achieving modern monopoly status after 10+ years of subsidizing value, the platform still needs to continue to start new platforms and/or acquire existing, up-and-coming platforms. We call this platform innovation and it’s necessitated because platforms don’t own their supply chain like linear companies. For example, Coca Cola owns factories and its distribution channels while Uber only coordinates a network of drivers and riders without owning the transportation assets. Platforms have a network of supply rather than owning telephone lines like AT&T. More direct ownership of supply chain assets resulted in monopolies of past to create unfair conditions for consumers i.e. AT&T refusing to improve telephones. This means that modern monopolies don’t have the same lock-in power that linear monopolies had on their customers by gobbling up all the supply in a market.
Technology and human behaviors change so fast in the 21st century that preferences for both producing value and consuming are in constant evolution. For instance, Youtube was the de facto way of creating and consuming video content, but Snapchat is capturing a new generation of content producers and consumers. Preferences change and platforms must evolve or be left in the dust. Platforms are dependent on consumers and producers and not the other way. Very different from linear monopolies.
Modern monopolies aren’t just at war with other startups, they also fight with other modern monopolies because their ecosystems will naturally overlap when at scale.
When Google Search became the predominant content platform to organize the web’s information, Microsoft bought its way into 2nd position with Bing. When the iPhone cornered the majority of profits in the smartphone industry, Google’s Android slowly chipped away and gained more market share and Microsoft bought Nokia to start building its own hardware for a tablet competitor. Being third in a platform industry is never a good thing, but the major tech giants had so much at stake that the risk was worth the reward even after Apple had staked out its modern monopoly positioning.
Net-net, competition is thriving in the world of platforms and consumers & producers are benefiting from it.
Modern Monopolies shouldn’t be subjected to the same negative stereotypes of linear monopolies from the 20th century like AT&T.
Instead, regulation and society-at-large should come to appreciate and understand how these new platform business models work and are dominating the 21st century economy.
Alex Moazed is co-author of Modern Monopolies along with Nicholas L. Johnson.
