Don’t Be Evil

Building a fair economy in a world of digital monopoly

Peter Thiel is one of our smartest investors. He helped build Pay Pal and was the first real outside investor in Facebook. He’s also an uber libertarian. He has a plan to build islands outside the range of any government to house his enterprises. He’s about to publish a book which says that we should embrace monopoly digital capitalism.

Nevertheless, devaluing competition is a central theme of Thiel’s new book. He asserts that “capitalism and competition are opposites,” because “under perfect competition, all profits get competed away.” He exhorts entrepreneurs to seek out monopolies, concluding, “All happy companies are different: Each one earns a monopoly by solving a unique problem. All failed companies are the same: They failed to escape competition.”

Essentially what Thiel is saying is that the reason Google or Facebook are so successful is that they have created a monopoly and we should celebrate their success. Even now we are debating whether to let Comast create a defacto monopoly in hundreds of local markets in the U.S. I wrote, what for me was a fairly scholarly article on this idea of digital monopoly capitalism last spring. But now I realize why Thiel and Sergey Brin and Mark Zuckerberg are libertarians. They believe in their own good will so much, that they don’t believe there is a need for government to regulate their monopoly business. Here is Thiel in a piece in the Wall Street Journal entitled “Competition is for Losers”.

A monopoly like Google is different. Since it doesn’t have to worry about competing with anyone, it has wider latitude to care about its workers, its products and its impact on the wider world. Google’s motto — “Don’t be evil” — is in part a branding ploy, but it is also characteristic of a kind of business that is successful enough to take ethics seriously without jeopardizing its own existence. In business, money is either an important thing or it is everything. Monopolists can afford to think about things other than making money; non-monopolists can’t. In perfect competition, a business is so focused on today’s margins that it can’t possibly plan for a long-term future. Only one thing can allow a business to transcend the daily brute struggle for survival: monopoly profits.

I have a slightly different view on all of this. Google and Comcast are not the Ford Foundation, just trying to make a better world. They are very aggressive profit seeking firms trying to raise barriers to competition. As I have pointed out elsewhere, Comcast and its lobbying arm(the NCTA)have fought tooth and nail against municipal utilities that wanted to offer fiber to the home broadband service to their customers. But it may be that there is such a thing as a “natural monopoly”. Certainly one could argue that both search engines and Broadband ISP’s fall under this model. At the start of the American communications revolution we decided that both telegraph and telephone services were natural monopolies, because having hundreds of wireline providers was ridiculously inefficient.

New York City-1890

What we did do was regulate both Western Union and AT&T. The result was an age of extreme innovation. As I have written before, all you have to do is look at the AT&T Research Lab during it’s most regulated era.

Bell Labs was a subsidiary of the monopoly telephone company, A T & T. Because A T & T didn’t have to spend billions on advertising (A T & T spent almost $2 Billion last year), they could dedicate a huge budget to their R & D Lab. As written in The Idea Factory: Bell Labs and the Great Age of American Innovation, the transistor, the microchip, the solar cell, the microwave, the laser, cellular telephony all were invented along with myriad other things we take for granted.

The notion that we should just trust Google or Comcast to “not be evil” is naive in the extreme. On the other hand, a regulated monopoly like the Bell System in the 1940's and 1950's can actually be rather efficient as it doesn’t have to spend billions of dollars trying to market a commodity product. Think about the last time you saw an ad for Google’s search engine. And, like Google and AT&T in it’s regulated era, the firm can spend a lot of money on R & D which ultimately benefits the society as a whole. But the creative economy that is developing is going to be increasingly dependent on Google, Comcast, Amazon and Facebook for distribution. Look at the influence of Google’s You Tube on the music business. Even though most of the most watched programming on You Tube is music videos, the musicians get a very small piece of the advertising revenue that You Tube generates. And to make matters worse, You Tube is the largest platform for unauthorized (pirate) streaming of music. The irony is that because there is so much competition on the content creation side, all of the power ends up in the hands of the monopoly (or duopoly) distribution platforms.

As a society we are going to have to decide fairly soon whether Comcast, Google, Facebook and Amazon are some sort of natural monopoly that needs to be regulated or whether we are going to pretend that competition and capitalism can exist in harmony in the digital age. Peter Thiel knows that’s a fantasy, but do the regulators in Washington? The digital monopolies can either be part of the problem or part of the solution. But I’m doubtful that we can rely on their protestations of “don’t be evil”, while continuing this regime of unregulated monopoly.

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