Why Are Monopolies Bad? An Analysis of 6 Rise-and-Fall Companies

Why are monopolies bad?When I think of monopoly I think of a mustachioed man with a nice hat and a highland terrier.

I also think of family arguments and Christmas flashbacks; Monopole mon amour, directed by Resnais…

Yet, those aren’t the only monopoly connotations you should be worried about. The New York Times recently reported that a whopping 77% of mobile social traffic is owned by Facebook, 74% of the ebook market is Amazon, and Google owns 88% percent of the search advertising market.

They aren’t the only monopolies around and they’re only in specific sectors. A report from eMarketer showed that in 2016 Facebook and Google collectively accounted for 57% of all mobile advertising – and that figure is rising. Maybe it’s not a monopoly at all, but a duopoly?

Market position isn’t static, it’s dynamic. Monopolies form and fade, doing so in response to specific factors and environments.

In this article, we’ll look at the rise and fall of some monopolistic scenarios and try to learn a little about how this current dominance may look moving forward.

History repeats itself, first as tragedy, second as AOL

East India Trading Companies and the birth of corporate monopolies

why are monopolies bad coat of arms east india company

One of the first widely known examples of monopolies may be that of the trading companies established as quasi-feudalist mercantilism began to transition closer to what we might consider early manifestations of capitalism.

(Finally managed to make use of my degrees…)

This was the birth of empire and the global expansion was delivered largely through the competition of private forces. The East India Company (EIC) was the British wing of this venture and, at its largest, its operations amounted to half the world’s trade. It traded in cotton, silk, salt, tea, opium, and much more. The company ruled much of India until 1858 when the British government stepped in and established the Raj.

What we see in the East India Company is a business established during a period of broader social change. The legal foundations which enabled capitalist modes of exchange had been formed in Germanic states and the codification of laws and legal practices was beginning to occur across northern Europe.

The printing press had been invented by Johannes Gutenberg in 1440, only 160 years before the EIC received its Royal Charter. Europe was going through an information revolution; albeit, a much slower one than we’re enjoying now.

why are monopolies bad printing pressAccording to Professor Jeremiah Dittmar of the London School of Economics, writing in 2011, European cities which adopted the printing press experienced 60% higher economic growth than those which didn’t buy into the technology from 1450 to 1600. Ironically, in the context of this article, the printing press itself was monopolistic as the knowledge of materials was quasi-proprietary:

The first known “blueprint” manual on the production of movable type was only printed in 1540. Over the period 1450-1500, the master printers who established presses in cities across Europe were overwhelmingly German. Most had either been apprentices of Gutenberg and his partners in Mainz or had learned from former apprentices.

The point is that the East India Company was entering new waters, both literally and figuratively.

It was built on technological and social advancements and being the first big player on the scene. It was helped by being granted a legal monopoly from the outset, but it had competition to face too.

The Dutch East India Company (VOC) was founded in 1602 and was awarded a 21-year Dutch monopoly from the outset. There are some, including Timothy Brook and Bryan Taylor, who would argue the VOC were the most successful company ever to exist. Though the two, VOC and EIC, held multiple monopolies between them, neither completely outstripped the other.

A duopoly was held.

Ultimately, the EIC was to lose its privileged position. The company was now in some financial difficulty and after the Indian Rebellion of 1857 the British government nationalized the company, absorbed its army, and gradually wound down its operations until 1874.

The monopolies collapsed due to a changing market, unsustainable growth, and state intervention.

Keep this in mind.

The rise-and-falls in the information age

IBM, the first real tech company

why are monopolies bad ibm personal computerIBM was one of the first tech monopolies within what we now consider to be the tech space. Founded in 1911 and named IBM in 1924, it had a solid hold on expertise and market share for most of the twentieth century.

IBM came up with so many of the technologies which we now take for granted. The first commercially available modern computers were thanks to the research and development undertaken within the company. IBM even launched the first smartphone – without commercial success. The ability to be ahead of the curve innovation-wise meant that not only did IBM lead the pack, but other companies were reliant on the services or hardware it offered.

Despite all this success, IBM no longer has a monopolistic position in the market. That’s not to say they’re not doing well – $80 billion in revenue is no small number. Yet, IBM now makes up one of many businesses operating in the specific sectors it fills. More than that, there are worrying signs as IBMs revenue has declined for the 20th consecutive quarter.

The success of IBM was first threatened when other companies began entering into their turf, making hardware which could compete with IBM – particularly aiming that hardware at the consumer market. This failure to engage the consumer is reflected even further in how IBM lagged behind with the rapid expansion of the internet. IBM lost out recently to Amazon for a CIA cloud computing contract worth $600 million, even though IBM’s proposal was 30% cheaper. It turned out that the IBM proposal was simply significantly worse than Amazon’s pitch.

IBM hasn’t collapsed, by any means. But it lost its dominance in line with significant trends:

  • The first on the scene won’t hold its market share forever
  • New markets open up and others are faster to exploit this
  • The internal organization becomes difficult to negotiate

On this last point, it’s worth mentioning IBM’s Roadmap 2015 – dubbed Roadkill 2015 by employees – which was geared according to Businessweek to benefit short-term shareholder returns at the expense of staff and long term success with customers.

According to Steve Denning, from the Forbes article linked above:

The real challenge for the CEO of IBM is a fundamental shift in business goals and culture. Instead of a world where a high-pressure sales teams can lock in customers to long-term contracts for using unchanging software with high margins, now IT services providers have to compete with firms that offer continuous innovation, pay-as-you-go fee structures and freedom to exit any time. To compete successfully in this emerging world, the IT service providers will have to delight their customers on a continuing basis, by offering continuous innovation.

The old fashioned corporate business model which led IBM to success in the twentieth and early twenty-first century is no longer what customers are looking for. IBM’s delivery of corporate and small business software was disrupted partly by the innovative practices and models of cloud-based startups in that scene.

why are monopolies bad salesforce-service-cloud-colourJohn Wookey from Salesforce told the New York Times:

The economics are different, but what is really different is the relationship with the consumer. We issue a new version of the product every four months. If the customer doesn’t like it, he stops paying.

Technological innovations like cloud computing and the availability of powerful hardware to all opened up space in the market for companies to offer greater flexibility to their customers’ needs. Add to this the fact that startups are generally significantly more agile than large businesses, who have to pass every change and proposal through multiple boards of managers and executives, then you end up compounding the impact of this flexibility.

As Denning put in 2014:

Established firms like IBM are used to operating in a world where new versions of packaged software come out every few years, making it difficult to get out of a license when company data depends on it. The emerging world of cloud computing will require much greater agility.

Wookey’s Salesforce now has a revenue of $8.39 billion – over a 100% increase on their 2014 figures.

We’ll leave IBM and Salesforce with this quote to bear in mind from Wookey:

The hardest thing is to be successful again when you’ve been successful in the old world

AOL probably gave away more free CDs than anyone in history

why are monopolies bad aol welcome

AOL is still a household name, but there are likely many Millennials now entering the workforce whose only reference point is the late nineties rom-com You’ve Got Mail – which, surprisingly, has aged better than AOL.

It isn’t really fair to single out AOL alone without looking at the battle which raged afterward. AOL was the center of the internet. It provided the search and emailing capacities that so many relied on. Unfortunately for AOL, the pioneer will eventually lose its dominance.

AOL’s most powerful moment probably came in November 1998 when they bought the most popular browser of the time: Netscape. AOL was integrated into so much of internet life and everyone I know has clear memories of throwing away those free CDs they gave out.

Sadly, for the tech pioneer, the merger with TimeWarner proved to be a fairly unsuccessful move and was followed up with the dot-com crash which saw the company stock plummet from $226 billion to a paltry $20 billion – a pauper’s figure.

With an inability to recover, we see a few similar steps typical of a dying star:

  • Massive staff cuts and relocation
  • CEOs are replaced in relatively quick succession
  • Acquisitions are attempted and prove unsuccessful – AOL bought Bebo in 2006 for $850 million. Awkward.

why monopolies are bad Youve-Got-Mail-Hero

However, there are some glimmers of hope for AOL. In 2013, the Wall Street Journal reported AOL had seen its first quarterly growth figures in 8 years as it tried to push its way into the online advertising arena. Verizon bought AOL in 2015 for $4.4 billion in cash. A monumental fall from $226 billion grace.

The decline of AOL can ultimately be put down to similar factors to IBM. The key, according to Christina Warren, was the arrival of broadband. This technological advancement meant that faster internet was available – plus, it got rid of the whole modem screeching thing, which I still believe should be given more credit than it normally is.

With AOL no longer being the only route into the internet for so many customers, the market opened up and consumers had more choices presented to them. AOL’s dominance and focus on being an ISP rather than a provider of consumer services meant small competitors were able to step in and sweep up new users.

The agile customer facing companies who focused on providing search and mail capabilities had a field day. AOL lost significant market share to both Google and Yahoo, leaving the two to fight it out amongst themselves for the advantage.

Which brings us to an interesting question. We’ve seen some examples so far of why monopolistic companies fail, but not clear examples of how other companies step in to take their place.

Wookey attached Salesforce’s successes to modern software practices – iterations and regular deployment, customer facing attitude, and a focus on flexibility. But much of these philosophies can be tracked back to the post-AOL fight for the internet.

How did Google beat Yahoo and what can we learn from this?

why are monopolies bad google beta

Mohit Aron, an ex-Google employee writing for TechCrunch, looks at the technological infrastructure behind the two companies to give an insight into considerations you have to make within a business to be able to manage scalability is an effective manner.

Yahoo’s system was based on NetApp filers, a third party system which allowed them to expand rapidly – adding new features and meeting customer demand. Alternatively, Google started work on what came to be known as the Google File System. This was an internal project to define the infrastructure of the company and have a solid base to work from.

The results of these differences were that Yahoo was able to meet immediate demand faster and expand rapidly, but that its services were less stable and reliant increasingly on third parties – which became expensive the more expansion occurred. Google, on the other hand, had to be a little slower in releasing new features at first, but this forced them to hone and refine the core features they did have. Then, once the architecture was in place, Google was able to accelerate forward and release more features more quickly than Yahoo with lower relative overhead costs and greater stability through the consistency across the company.

According to Aron:

I believe the lessons here extend beyond infrastructure or application engineering, and offer insight into what it takes to build a sustainable business. It speaks directly to one of the most important things I’ve learned from my time at Google: the need to completely understand the problem before even considering the solution.

It was Google’s long term vision and understanding of what they needed to do which gave them the advantage over Yahoo. The greater infrastructure is merely a symptom of that difference. One could say the classic UX and UI of Google is a symptom of that too. There was a clarity surrounding Google.

So, AOL lost out because they were on the wrong end of a technological shift. Their market dominance proved largely meaningless once the area changed.

New companies were able to exploit this niche by being agile and riding the technological wave.

The company which exploited this most of all was Google, as it had a clear sense of direction and implemented long-term planning from the outset.

The pros and cons of monopolies; pass Go, receive $200?

why are monopolies bad monopoly manMonopolies are not necessarily 100% bad in and of themselves.

When a firm like Facebook comes to a position of dominance so quickly, it is quite clear that they are offering a service which solves a problem for the user; it adds clear value.

However, the long-term effects of monopolies, almost regardless of how we might personally feel about the specific company in question, are often negative. Though, they can have positives too.

Leonard E. Read, writing for The Atlantic in 1924 and published now for the FEE lays out some of the typical considerations of monopolies and their effects on the market and the consumers.

There are two ways to attain an exclusive position in the market, that is to say, there are two ways to achieve monopoly. One way is not only harmless—indeed, it is beneficial; the other is bad. The beneficial way is to become su­perior to everyone else in provid­ing some good or service. The bad way is to use coercive force to keep others from competing effec­tively and also from challenging one’s position. Rise above others by excellence, or hold others down by coercive force!

Consider my Facebook example given above. I credit Facebook with gaining dominance by providing a good service, but I overlook their expanded market share which is partly due to the acquisition of Instagram and Whatsapp. These business tactics are not somehow avoided in the world of tech; businesses act like businesses even if the CEO wears a t-shirt.

Reaching a dominant market position large enough to be considered monopolistic simply through providing a better service than competitors doesn’t have too many immediate concerns attached to it. However, as companies grow and mature they don’t always stay exactly the same. We shouldn’t trust in a company to act nicely simply because we like their product. Their motivations will be business ones like any other.

Mark Thoma, reporting on Google’s negotiations with European regulators in 2014 for CBS’s Moneywatch, writes:

When firms have such power, they charge prices that are higher than can be justified based upon the costs of production, prices that are higher than they would be if the market was more competitive. With higher prices, consumers will demand less quantity, and hence the quantity produced and consumed will be lower than it would be under a more competitive market structure.

The bottom line is that when companies have a monopoly, prices are too high and production is too low. There’s an inefficient allocation of resources.

These simple economic stances generally ring true whether the company in question is a big data tech giant or a trading company with its own private army. Monopolies are generally not good for the consumer, even though they can present benefits.

One could take a narrative view of this, given our historical approach, and suggest that individual moments of monopoly are bad for the consumer but the continual competition and rise-and-falls creates a long term process which can prove beneficial.

Maybe a monopoly is not too bad as long as there’s a chance it can fail?

You can make your own mind up.

Innovation, disruption, and you

why are monopolies bad innovation

If there is a chance a monopoly can fail then it is reliant on some form innovation or disruption as we’ve seen from our historical examples. Who will rise up next is largely defined by their relation to these factors also.

Ex-Paypal and now Palantir head honcho Peter Theil has stated that he doesn’t like the use of the term disruption, stating:

Disruption has recently transmogrified into a self-congratulatory buzzword for anything trendy and new. This seemingly trivial fad matters because it distorts an entrepreneur’s self-understanding in an inherently competitive way

For Theil, a product shouldn’t simply be cheaper than its competitor, possibly through some shady business practice or “innovative” business model – however you wish to phrase it. Companies which become monopolies have to start off with something which holds true to the original feeling around the word disruption.

They must identify a need which isn’t being served or a need which could be served in a better way, not simply cheaper. For Thiel, that is the cornerstone of innovation and that is what you must start with to build a monopoly.

Because, arguably, the only way to really beat monopolies is to build them.

Counterintuitive, I know.

Peter Thiel has 4 key takeways to consider to try to build a mini-monopoly for your niche:

  1. Start small and focus on the niche of your niche. Really focus your concept and your direction to do something really well.
  2. Gradually grow by expanding your services and options one by one through iterations, like how Amazon added CDs alongside books.
  3. Going head-to-head with competitors is not always recommended – try to do something a bit different and have a real creative difference between the two of you.
  4. Have a long term plan and know where you want to be in a few years time. Being the first to market doesn’t guarantee long-term success. As our Google vs Yahoo battle demonstrated.

These monopolies are growing. Should we be worried?

why are monopolies bad monopoly car

Columbia Law Professor Tim Wu suggests that we shouldn’t be quite as worried about monopolies in the internet age because they can be beaten. One of the defining elements of this is the half life of domination. As Erick Shonfeld put it in 2010:

AT&T ruled for 70 years, Microsoft ruled for maybe 25, so far Google has ruled for 10. Will Facebook rule next, and of so, for how long?

Seven years later and our data in the introduction to this article shows that Facebook is playing a much larger role within the industry than it was previously and has the social element of the industry cornered.

As Tim Wu phrases the argument:

Are today’s internet monopolies really comparable to the info monopolies of other ages, like AT&T, the Hollywood studios, and NBC? Informed by the apostle of creative destruction Joseph Schumpeter, some agree that Internet monopolies are inevitable, but insists also that they are also inherently vulnerable and ephemeral. Just wait and today’s monopolies will be reshaped or destroyed by disruptive market forces. Bing may have had a slow start, but it may still run over Google, and if not, perhaps the rise of mobile Apps will make search engines irrelevant altogether. The theory is based, in part, on an inescapable truth: all things change.

Bing lol.

But there are serious points in here too.

  • The barriers to entry within digital technologies are lower than at any point in the past, particularly relative to attainable market reach.
  • Major technological shifts and advancements are occurring at shorter intervals. What if virtual or augmented reality accelerates in the next decade and suddenly a whole new market opens up which new firms find success in?

It’s difficult. The Economist published an article in May 2017 arguing for greater anti-Trust rules regarding tech giants. The article postulates that data is the new oil. But it comes to a worrying conclusion. That the expanding nature of networks adds to the overall amount of available data isn’t a new idea, but when viewed through the prism of monopolies it makes for very sobering reading.

If Google or Facebook are able to gather more data by orders of magnitude than their competitors while also holding on to the users through usage and engagement with their products, their ability to advertise and do so effectively and cheaply destroys competitors within the field. Every step ahead of the competition accelerates their advantage; like the Amazon Flywheel concept we’ve discussed before in our article on the delivery process.

As such, the Economist argue for authorities to take into consideration more than just company size when assessing mergers, to take into consideration the data assets held by each company. They argue, for instance, that Facebook’s willingness to pay $19 billion for Whatsapp despite a lack of revenue should have been a major red flag.

The second measure the Economist argue for is greater transparency of data. This could be as simple as allowing consumers to see what data is held, how it’s used, and how much money is being made from it. Or, it could be the more radical solution of beginning to see data as a public utility and having a shared collection of data which companies can use and draw from – subject to guidelines and such.

The initial suggestion is a classic step to stop monopolies and simply reflects an updating of traditional systems. The discussions about data management, however, provide a lot more to reflect on and imagine. The designation of data as a public utility would destroy the systemic monopolistic advantage of the Facebooks and Googles of now and in the future.

Games of Monopoly come to an end, even if it feels like forever

why are monopolies bad family playing monopoly

Our best way to challenge these monopolies then is to encourage startups to become better, be prepared to break new technological boundaries and to consider how legislation can impact on the way monopolies are formed and perpetuate.

If I’m putting my free-market hat on, I’d be advocating for greater competition to disrupt this concentration of power and market share.

But also, it’s needed to keep pushing and supporting those infrastructural elements which enable startups to form and to emerge in the market as potential players. As Paul Graham makes clear, it isn’t a coincidence that Silicon Valley has been a continual producer of top tech firms. An environment has been constructed there which is beneficial for the growth of companies – particularly those which aim to do something different. In doing so, this draws the right people necessary to come together, mix, and give birth to exciting new concepts and products.

From educational systems to government investment schemes, there is a range of things which can help lay down the grounding upon which these environments can grow and flourish.

Monopolies aren’t bad in and of themselves. But if monopolies don’t come to and end then it’s a sign of a lack of innovation, growth, and progress.

Someone will end their dominance. Could it be you?

What do you think about Facebook and Google’s current dominance? Is it long term, or is there a technological change around the corner which is going to unseat them?

Get our posts & product updates earlier by simply subscribing

Adam Henshall

I manage the content for Process Street and dabble in other projects inc language exchange app Idyoma on the side. Living in Sevilla in the south of Spain, my current hobby is learning Spanish! @adam_h_h on Twitter. Subscribe to my email newsletter here on Substack: Trust The Process. Or come join the conversation on Reddit at r/ProcessManagement.

Leave a Reply

Your email address will not be published. Required fields are marked *

Take control of your workflows today