Are the tech monopolies different?
This is an edited extract from ‘Tech Giants and Civic Power’ by Martin Moore, published by the Centre for the Study of Media, Communication and Power at King’s College London.
Google/Alphabet, Facebook, Apple, and Microsoft are amongst the most valuable companies in the world and have a global reach of over one and half billion people. In some markets, such as general search, they hold dominant, if not a monopoly, positions. Yet, even if one accepts that these organisations are monopolists or oligopolists in certain markets, are they different from traditional, non-digital monopolies? There is a strong argument that, in at least three ways, the tech monopolies are distinct from their analog equivalents: with respect to pricing, network effect, and choice.
On pricing, making their services free to the public at the point of use differentiates these organisations from traditional monopolies and may mollify certain traditional concerns about them. Classical economic concerns about monopolies centre on monopolist’s ability to control prices. Once in control of the market, the monopoly provider can charge the customer a higher price, and the customer is unable to go elsewhere for a comparable service. ‘The price of monopoly’ Adam Smith wrote, ‘is upon every occasion the highest which can be got… The price of free competition, on the contrary, is the lowest which can be taken’ (An Inquiry into the Nature and Causes of the Wealth of Nations, 1776). Yet, if the dominant provider is not charging anything for the service, it is difficult to argue that the concern still holds or that the provider is misusing its position of dominance.
Google made this argument in response to the European Commission’s anti-trust charges against it. ‘The statement of objections [served by the Commission] fails to take proper account of the fact that search is provided for free’ Google wrote, ‘A finding of abuse of dominance requires a ‘trading relationship’ as confirmed by consistent case law. No trading relationship exists between Google and its users’ (from Reuters, 2015). The lack of a trading relationship also makes it very difficult for a user, or a regulator, to establish the value of the exchange.
Digital monopolies may also differ from traditional monopolies, particularly natural monopolies, with respect to the network effect. Natural monopolies are ‘those which are created by circumstances, and not by law’, such as water, railways, and fixed line telephones’ (J.S. Mill, 1848). They generally require initial infrastructural investment, investment that is then offset by the subsequent benefits of the network effect. For users, the network effect means that the service becomes more useful and effective the more people use it.
The information intermediaries are reliant on, and the beneficiaries of, the network effect. Facebook would be a far less useful service if fewer people used it. Yet, in the case of the information intermediaries, the network effect is different to previous network effects — such as the telephone or railways — in terms of its speed and spread of adoption. It took 64 years for the telephone to reach 40 per cent penetration in the US, but only three and a half years for social media to reach 50 per cent. In this sense it might be more appropriate to call it a ‘sheer’ network effect, given the steepness of its take-up.
The same factors that allow for an upward sheer network effect could, theoretically, work in the opposite direction. In other words, digital intermediaries could decline at a similar speed to that which they grow. This, again, is different than traditional network monopolies whose investment in the infrastructure of the network can act as a barrier to entry for other providers and as a disincentive for people who may want to leave. The cost of building railroads and investing in trains, for example, acts as a barrier to potential competition. By contrast, the infrastructure of the net is already in place. Similarly, there is a cost, to a train user, associated with switching from using train travel to an alternative mode of transport. By comparison, the cost of switching from one online service to another may be much lower.
This leads to a third difference between digital monopolies and traditional ones. Monopolies, it has traditionally been argued, reduce consumer choice. When Henry Ford dominated the US car market in the early twentieth he famously quipped that ‘Any customer can have a car painted any colour that he wants so long as it is black’ (Ford, 1922). Yet digital monopolies have been successful partly because they help enable consumer choice. Google search is successful because many people believe it is the most effective way to navigate information and help them filter an over-abundance of choice.
Partly for these three reasons — pricing, network effect, and choice — commentators have seen these tech giants as different from their analog equivalents. ‘[H]igh market concentration levels cannot simply be interpreted in the same manner as in conventional markets without network effects’ (Haucap and Heimeshoff, 2013). Some also accept that in some of these markets, monopolies or oligopolies may be almost inevitable. ‘It is well-known in the literature that an equilibrium can sustain only a small number of such intermediaries and a concentrated market structure is thus expected’ (Helberger, 2014). There is also a growing acknowledgment that in certain digital markets, for better or worse, there will be one, or a small number, of dominant providers. As Jaron Lanier and Andrew Keen note, this means that in some digital markets, it is highly likely that ‘winner-takes-all’ (Lanier, 2013; Keen, 2015)
This does not, of course, address the personal, the political or the civic questions that are raised by the scale and dominance of these companies and their services. Nor does it answer the complex economic questions about how the differences between digital and traditional monopolies play out. We do not, for example, know how the collection and use of personal data may give an information intermediary an unfair competitive advantage in other commercial sectors. To what extent does Google or Apple’s knowledge of our movements give them an unfair advantage if they decide to develop cars or new transport systems?
Disputes over how we classify the tech giants and how we express their dominance are not just semantic. Were Facebook to be defined as a utility, or Google search a natural monopoly, it would raise immediate public interest questions, and amplify calls for the regulation of these services that these companies are so keen to avoid.
If one does conclude that it is appropriate to consider some of these services ‘natural monopolies’ then that necessarily raises the question of how one ensures that they do not misuse their monopoly power, and how the benefits they gain from their monopoly services (particularly, in this case, in terms of personal data) can be shared such that they do not solely benefit other services offered by the same provider.
When democratic governments come to respond to the tech giants, as they have started doing already and will do increasingly, they will need to take into account their differences from traditional dominant or monopoly companies. This will include acknowledging where the tools — notably the legislation and regulation — that they currently have available to them, are not adequate or suitable. New approaches will be necessary if democratic responses to these organisations are to be progressive and successful.
Read the full study — ‘Tech Giants and Civic Power’ by Martin Moore — at the Centre for the Study of Media, Communication and Power at King’s College London (click here).
