Capitalism today: burn burn burn to earn earn earn
Or: Crowd-funding and open source software are self-defense for the ever losing customer
Need a business strategy? Easy. Burn serious money. No, not thousands, not millions, no, but billions of money burned can and will lead to really kickass earnings. Impossible for you? Yes, I thought so, but not for big trusts. It was and is done around the globe for more than a decade now. How it works is best explained by an example: The story of the mobile communication provider market in Germany.
There were already some companies offering mobile network services to customers as the internationally very prosperous provider Vodafone decided to enter the german market too. Instead of starting from scratch,Vodafone bought the german provider Mannesmann D2 in the year 2000 for the purchase price of 190 billion € (just a marginal note in this story is, that the german managers received all-time-high end-of-contract gratuities and were therefore prosecuted). Afterwards the war for the customer began.
With the offer of high commissions for every client brought by anyone, the firms battled for each contract available. Drawn by the high margins, tens of thousands became entrepreneurs or changed profession and just as many shops emerged all over Germany, selling mobile phone services to it’s happy citizens.
The reason for selling cheap with high commissions was not to sell, it was all about market share. The goal was to reach an oligopoly at minimum, a monopoly at best. Only in such an environment the mobile carriers would have a chance to get all the burned money back. Then they would be able to bill the customers without the hindrance of too much competition (an economical state, which for example oil companies have “achieved” long ago).
Other large corporations joined the battle with billions of cash stacked for the ongoing fight over every percentage of the market. But with amounts between 5 and 20 billion € they were fast exhausted and had to give up. Finally it came as intended: around 2005 only four companies worth mentioning remained. Like switched on, they all changed strategy syntonic in this very moment. Instead of selling mobile services with high commissions, the firms betrayed their agents and favoured their own channels of distribution (with low costs and services). The commissions for the shops dropped significantly and the best offers were only available on the websites of the mobile carriers. Hence thousands of free mobile phone shops went bankrupt within months. The just invented new entrepreneur: (free) mobile phone shop owner was reduced to a mere historical footnote (few survived). The social security system had to care for a lot of new redundant workers (side note: be careful, when doing business in the shadow of just one large corporation).
But that was not enough burden of the community for Vodafone. Knowing that the times of higher yields due to lower competition would start soon, Vodafone initiated a tax write off of the purchase price for Mannesmann D 2 in 2004 (of course not enough either: they also reduced their taxes out of the deal in Great Britain). Referring to the long years of losses (in the absolutely intended battle for market shares) Vodafone claimed, that they obviously had paid too much for Mannesmann D 2. Unfortunately the legislative body and financial institutions in Germany were (and are!) not familiar with basic concepts of a free market (as for example, that the market value of a good is the price agreed between two parties or that money burned can lead to even higher revenue), and granted the tax write off of 50 billions € of the purchase price. Consequence: at the dawn of the financial harvest due to the oligopoly, Vodafone started with a (just fiscal) loss of 50 billion € and was able to cash all the earnings of the following years tax free! The state had so financed the – from the very beginning – calculated battle for the customer. Finally the citizens had to pay not only the rising prices for the mobile services, but also as taxpayers for the deficit of the state.
It shall not be kept secret, that (fortunately) new competitors arised (even outside of the telephone market, as for example WhatsApp) and the plan of Vodafone might not immediately have come out as optimal as planned, but they are one of the big players in the huge german market for telephone services now, a constant flow of earnings is secure for long years to come. The money burned was just an investment (meant to literally burn the competitors). P.S.: Just while drafting this article, the German provider no. 4 O2 (affiliate to the Spanish Telefonica) announced, that it will buy the no. 3 E-Plus (affiliate to the Dutch KPN group) for the purchase price of € 5 billion in cash and a 17.6-percent stake in Telefonica Germany. Even in the first comments the main opinion is, that not the competitors (Telecom and Vodafone), but the customer will be the loser of this merger. It is common experience, that the competitive pressure in a tight oligopoly of three is considerably lower than with four providers.
The same strategy can be observed all over the world. Large corporations literally burn money until they reach at minimum an oligopoly and are able to exploit the from then on defenseless customer. As additional benefit they can even economise their service (quality); anyone who endured the hotlines and web forms of these firms can sing an endless song about this fact. All a corporation needs is more money to burn than (most of) their competitors. If not, they will fail, as for example Wal Mart in Germany. The big american supermarket tried to enter the german market too. They had brought billions to burn. Soon in the german market for foodstuff happy times for the customers emerged due to the starting battle between the new american player and the established german providers. Food was sold below the acquisition price of the supermarkets for years, until finally Wal Mart had to realise, that their german competitors won’t dry out fast enough. They gave up. Billions of dollars burned, in this example without success (maybe also because of a clash of cultures).
What is the defense against such a reckless burning of money? Anti-trust law may prohibit selling below of the acquisition price to harm the competitor, but this is hard to proof. Obviously the legislations and administrations all over the world are not able to fight this strategy. As always it is up to us (citizens, tax-payers and customers) to stop large companies from obtaining an oligopoly. At first there is our decision as a customer, don’t always watch out just for the price, be willing to pay more for better services for example. Unfortunately there will seldom be enough people to act with a long term rationality.
But especially in the digital world certain defenses against the superiority of the large company groups already exist. Open source software and crowd-funding are the means to break up encrusted oligopolies or even their accruement. The backing of these instruments are ways to achieve a better world with more competition, more service, fairer prices, better tax outcomes and therefore lower taxes for all of us (if your government is willing to waive part of its income — which is unfortunately not very likely).
So go out and back crowd-funding and open source software projects. Additionally we should demand more political support for these. One opportunity would be the ability to deduct financial contributions to these projects of the income tax. In some markets a more liberal patent and copyright policy could also be of help, but that is a totally different story.
At first there are more people needed to understand the value of crowd-funding and open-source software. It is a way to freedom, to not be defenseless exploited by large corporations. Please tell everyone.
