Five Reasons Why The Big Techs Dominate The Market
Facebook, Apple, Amazon, Netflix and Google market shares explained
Every day hundreds of new technology companies are founded by bright entrepreneurs and funded by optimistic Venture Capitalists.
Although there have been many success stories (and many more failures), no one has been able to take over Facebook, Amazon, Apple, Netflix and Google dominant positions in their respective markets.
These tech giants are worth together $4tn (£3.1tn) and each of these companies hold a large percentage of the market in their specific sectors.
Nope, it's not luck.
There are a number of structural reasons for the digital markets being highly concentrated, in industrial economics, these are defined as market failures.
This article analyses the key five reasons why the digital markets are so concentrated and how the first-mover advantage that these companies had impacted their long term success
Two-sided markets and network effects
The digital platforms operate in two-sided markets. In these markets, a platform connects two sets of customers. For example, Facebook connects users with advertisers, Amazon connects buyers with sellers and Apple connects iPhone users with app developers.
Two sided-markets are characterised by network effects. There are two types of network effects:
- direct (benefits to a user increase as the number of users increase) and;
- indirect (benefits to a user of one side of the market increase as the number of users increases on the other side).
An example of direct network effects in the digital market is a social network where the user wants to engage with as many other users as possible. An example of indirect network effects is Amazon where a buyer wants to have as many sellers as possible as this increases choice.
Network effects encourage concentration because the platform becomes more valuable as the number of users increases and this, in turn, incentivise more users to subscribe.
Economies of scale
Digital markets are characterised by high set-up costs and by the very low or near-zero cost of adding a user to the platform. As the number of users increases, the average cost decreases. This encourages concentration as the platform grows.
Economies of scale are limited in the physical markets by location and transport costs. In the digital markets, there is no such constraint. This encourages concentration at the global level.
Economies of scope
Platforms can reduce costs and increase quality by operating across different similar markets.
In other words, there are economies of scope in having the same users, suppliers and clients across different markets.
As such, platforms can increase concentration across markets and create an ecosystem.
Data-driven incumbent advantages
When technology companies gain traction in the market, they collect, analyse and aggregate user data that the organisations can then use to improve the quality of the services that they provide.
These data advantage creates conditions for the incumbent firms' concentration and prevents easy access to the market to new entrants.
Switching costs
The ability of consumers to switch easily among services or to use multiple services at the same time (multihoming) is an important condition for competition.
However, in the digital markets, users are limited by several factors including:
- Loss of personal data: for example, if a consumer wants to move from Instagram to another platform, the user would lose all the photo on the profile.
- Loss of feedback: Many digital services include a rating system. Switching would result in the loss of feedbacks.
- Inertia: Consumers in the digital market tend to prefer the standard option they know and are used to.
This results in limited switching and multihoming and increases concentration.
These factors are present in non-digital markets as well. However, what is unique is the simultaneous presence of all these factors that cumulatively result in lower competition and higher concentration.
Venture Capital Funds and Entrepreneurs should be aware and potentially exploit these “market failures”.
