Will new companies be able to compete with Modern Monopolies?
The book “Modern Monopolies: What It Takes to Dominate the 21st Century Economy” by Alex Moazed and Nicholas L. Johnson, is a guide for entrepreneurs to enable them to scale their businesses to be the next Modern Monopoly. The book provides extensive and useful guidance for entrepreneurs, to understand how “platform” businesses have emerged to become modern monopolies. Although the book tackles and provides solutions to the obstacles a start-up might face in this economy, it does not fully address the issues that they might face while entering a monopolistic market. The underlying assumption the authors fail to mention is a technological disruption in a market, which would enable start-ups to grasp network effects by doing “too little”. Furthermore, the authors diss age-old economic theories of regulating monopolies, that would otherwise help enable entrepreneurs to scale their businesses into the next Facebook, Google, or Uber.
The central argument of the book relies on understanding the ‘platform’ and ‘linear’ business models. A platform is a medium that does not buy or sell products but instead “facilitates the exchange value between multiple user groups” (Moazed, Johnson, 241). It serves to reduce the difficulty in linking these two groups and the transaction costs of purchasing. On the other hand, the authors define a linear business as a “company that creates a product and service and sells it to a customer” (Moazed, Johnson, 240). The authors are trying to reach an audience of fellow entrepreneurs, to make their case about why “platforms” are the future, and why a platform business model is more valuable than a linear business model. As they state, the purpose of the book is “If you’re an entrepreneur, we will help you understand what makes today’s most successful businesses tick and how you can replicate their success”( Moazed, Johnson, 16).
Businesses of the twentieth century relied heavily on the linear business model, as all the titans during that time such as General Motors, Standard Oil, Walmart, etc. were truly linear businesses. At the time, supply chains were helpful to these businesses as they create highly efficient structures in order to deliver their products to targeted customers. However, the authors now make their case that the supply chain is no longer the “central aggregator of business value” (Moazed, Johnson, 25) mainly due to increasing technological innovation leading to the creation of the platform business model. Platform businesses are valued two times that of a linear business model and have allowed industries to revolutionize in ways that have never been seen before. They not only have zero marginal costs but also have high revenue margins and when paired with large network effects they have the ability to become what the author calls a ‘Modern Monopoly’.
The authors also challenge the long-standing definitions and concepts of economics by explaining how platforms have transformed these notions. A monopoly is a company that owns a hundred per cent market share of its respective industry. Therefore, Moazed and Johnson define this new structure called the Modern Monopoly, which comes into existence because of thriving platform businesses. Unlike a traditional monopoly, modern monopolies do not reach a point of diseconomies of scale and have the ability to grow exponentially. The overarching reason for the creation of such monopolies is the modernization of communication and the development of complex software that allowed fixed and variable costs to be eliminated. Wikipedia is an example of a platform business that took over the 244-year-old reign of Encyclopedia Britannica (a linear business). Wikipedia is simply based on the internet and composed of “decentralized networks of autonomous individuals” (Moazed, Johnson, 68). By taking advantage of digitization, computation and connectivity it was able to transform into a modern monopoly.
According to the authors, the transition from a linear business model to a platform business model created a shift from maximizing supply chains to tapping into network effects. Supply chains used to be the central aggregator of businesses however networks have come to take over that role. The biggest challenge of a platform is building a network since success is being measured on the ability of a product to draw and keep users within it. Platform businesses primarily have a skillset that is social and has very little to do with the business model or even the product. Once the business has helped the world become more connected what the company may own matters a lot less, “network effects enable them to have winner take all dynamics” (MDIC — Medical Device Innovation Consortium, 2:24). For instance, Instagram or Facebook’s success merely depends on the network effects it is able to create. Moazed and Johnson say that for a platform business model building its network effects is what achieving the economies of scale looks like, as “value to each individual user grows as the network expands” (Moazed, Johnson, 93).
The question that arises here is that if network effects are such an important aspect of a business of this form, then how exactly would a smaller company tackle the issue? The author provides solutions to tap into network effects either by following the path of growing on an existing network or acting as a producer. While I do agree with the authors, they have not taken into account the power of a monopoly. When a monopoly becomes large enough, they have the ability to crush the competition. Speaking from a user’s perspective if they are already receiving the same service from a company at cheap rates then they wouldn’t have a reason to shift. Even if the newcomer would provide different features what is to say that the monopoly wouldn’t retaliate to incorporate the same features as well. Another important view to challenge is that “if the network is sufficiently large, both consumers and producers will happily join. But most users on either side of the network aren’t willing to join when the network is small” (Moazed, Johnson, 192) This essentially means that if a startup is unable to build its network due to the overpowering effects of larger monopolistic corporations how are they even to succeed? Or rather why would they consider entering the market?
Grabbing network effects in an already competitive market would mean that a new company would have to introduce a service better than the existing one. Yet, the authors suggest to young entrepreneurs that “trying to do too much” (Moazed, Johnson, 120) can lead to failure. The authors support this theory using Facebook’s success story against Myspace and Friendster, by keeping their products minimalistic. When Facebook started its business users could only view the profiles of people who went to their school and over time, they incorporated the features of accepting friend requests. The strategy clearly worked for Facebook, however judging the landscape of the economy, today’s startup most likely already has large competitors in their respective markets. The problem that arises over here is that software can be commoditized quickly, people can copy features relatively with little capital required, driving down margins. Therefore, if a startup is to compete with a monopoly in the same industry, then it should come to the battlefield with all weapons at its disposal. They would need to fulfil every demand a consumer might have in order to even begin to gain network effects or leading market share.
Platform business models have become giants in their industries, and just by understanding the power, they hold it is clear that they should be stopped. All economic concepts have always argued that monopolies may not always be in favour of the social, and economic welfare of the people and thus need to be regulated. Yet, the authors are of the opinion that these modern monopolies should remain unregulated. Their argument is based on the fact that with the “speed of technological change modern monopolies are not likely to last as long as their predecessors”( Moazed, Johnson, 105). Furthermore, the authors argue that users have the ability to “migrate much quicker” (Moazed, Johnson, 105) from one choice of platform to the other. Hence they conclude that there is no real need for government intervention to prevent these monopolies from growing as large as they have. Yes, in a sense this argument does have reason and makes a compelling case however it is to be noted that history proves otherwise. Facebook was founded almost 20 years ago, Amazon and Google have been market leaders since the 1990s, and Apple and Microsoft began in the 1970s. These are all platform businesses with monopoly powers and large network effects that aren’t changing, instead, they’re only getting stronger.
The authors also draw attention to the potential creation of platform ecosystems, “a platform to rule all other platforms”( Moazed, Johnson, 219). Even though, the author states that it could be unlikely for such a situation, judging how platforms have become modern monopolies I would say it is not impossible. Indeed, platforms are already starting to build ecosystems around themselves either by expansion or by acquiring competitors. Take Uber, for example, it has entered the market for food delivery and already acquired Postmates. Who is to say that they will stop there? Their large network effects and financial backing provide them with the capability to slowly gain market share even in that industry. Furthermore, the author also states that “competition is occurring between rival platform ecosystem”( Moazed, Johnson, 222) If there is a war going on in such big conglomerates why would a smaller company even enter this industry, or much rather it wouldn’t be wise to do so. “Platforms that fail to grow into their own larger ecosystems will slowly fade away, either by running into financial trouble or becoming acquisition fodder for larger platform companies” (Moazed, Johnson, 222). This is a clear indication that there needs to be some form of government regulation imposed on such companies, as the platforms that do become ecosystems will pose a great threat to the new companies in the industry.
Even in the event a new company manages to grasp the attention of users in the industry, a company such as Amazon would have the ability to simply buy it out in order to maintain its market share in the industry. Such as what Microsoft does very often when it buys out small to mid-sized companies before they become a threat. The repercussions of this, are that “a dominant platform can do so without the fear of destroying the network effect” (Platform Thinking Labs, 2021). Platforms like Amazon, Facebook, and Google have gotten enough power to “move entire economies”(Kennedy, 2020). Many supporters believe that an economy dominated by monopolies has the ability to become what is called an “authoritarian form of government”(Kennedy, 2020) which is why there should be more regulations for antitrust issues. On the other hand, others worry that “this position becomes self-sustaining because the data the platforms collect gives the companies an advantage their rivals cannot overcome” (Kennedy, 2020). So the question that really stands is will start-up companies ever really be able to compete?
Upon understanding the new economic theories, the authors have presented, along with the strong evidence provided, it is important to question the basis of their advice. In my opinion, the key factor the author failed to incorporate was the technological revolution that occurred. What the authors did do is mention how platform companies have come to become monopolies based on innovation in technology, however, what they should have done is laid down an assumption for all future CEOs that there must be a technological disruption to penetrate market share using their techniques. Had they done that, there would be no room to argue against their theory on how they can tap into networks or why doing too much can lead to failure. The technological change in the world is what allowed Apple to overtake leading smartphone companies like Blackberry. Apple truly innovated a product that resulted in the disruption of the market. If what it takes is a revolution on the scale of an industrial revolution, then how can start-ups compete with such large monopolies or even oligopolistic firms.
Luckily, the world still understands the grave drawbacks of having monopoly-controlled markets. “There have already been several massive fines imposed for anti-competitive behaviour (in the EU, Google has been hit by nearly $10 billion in fines) and regulatory scrutiny is intensifying worldwide” (Locsin, 2020). Furthermore, if more implications were to be imposed in the markets then there would be scope for smaller competitors to survive. A code of competitive conduct can be imposed such that new companies can compete while ensuring that the platform business model remains efficient and successful. Furthermore, if data sharing mandates are implemented on big firms then it would give start-ups an equal opportunity to compete. However, if platform ecosystems need to be stopped at a larger scale then a merger law can be created to prevent big platforms from acquiring companies that are competitive threats to them. Lastly, the “antitrust policy should continue to focus on maximizing overall economic welfare, not on protecting companies from legitimate competition. Other issues, such as privacy, data security, and political power, demand their own policies” (Kennedy, 2020).
From the way the author has presented an argument, it seems as though there are ways in which these companies can create a competitive environment, however, the chances of it being in the same industries as these powerful platform ecosystems are slim. While there may be several advantages to having a Monopoly such as lower costs for consumers achieved through the economies of scale, funds to invest in research and development, excessively efficient services and so on. There are also several disadvantages of a company becoming a monopoly. A firm with monopoly power does not allow easy entry of any new competition, in fact, it makes it so hard for uprising competition, that they cease to exist before they have started. So, has the goal of companies now changed to being “bought out” rather than staying in? Has this slowly become the new norm where companies just want to catch the eye of one of these platform ecosystems? If this is the way the world keeps moving, then slowly there will be platform ecosystems in all industries around us inhibiting new cultures, and new start-ups from evolving. But is that a desirable reality for innovation, competition, and society as a whole?
References
Kennedy, Joe. “Monopoly Myths: Do Internet Platforms Threaten Competition?” Monopoly Myths: Do Internet Platforms Threaten Competition?, Information Technology and Innovation Foundation, 23 July 2020, https://itif.org/publications/2020/07/23/monopoly-myths-do-internet-platforms-threaten-competition.
Locsin, Matthew. “Platforms Are Powerful Business Models — but Pitfalls Await the Unwary: Publicis Sapient.” Platforms Are Powerful Business Models — but Pitfalls Await the Unwary | Publicis Sapient, Publicis Sapient, 9 Oct. 2020, https://www.publicissapient.com/insights/platforms-are-powerful-business-models.
Moazed, Alex, and Nicholas L. Johnson. Modern Monopolies What It Takes to Dominate the 21st-Century Economy. St. Martin’s Press, 2016.
Moazed, Alex, “ Keynote: Alex Moazed- Modern Monopolies”, YouTube, MDIC — Medical Device Innovation Consortium, 26 Sept 2016, https://www.youtube.com/watch?v=D2JtwzAv1qM
“Monopoly Strategy: The Dark Side of Platform Monopoly: Monopoly Effect.” Platform Thinking Labs — Platform Strategist, 2 Aug. 2021, https://platformthinkinglabs.com/materials/the-dark-side-of-platform-monopoly/.
Zambrano, Erik. “Bloomberg Reviews Applico’s Modern Monopolies.” Applico, 9 Dec. 2016, https://www.applicoinc.com/blog/applicos-modern-monopolies-reviewed-bloomberg/.
