Imagine a not-too-distant future in which trustbusters force Facebook FB 0.51% to sell off Instagram and WhatsApp. Imagine a time when Amazon’s cloud and delivery services are so dominant the company is broken up like AT&T . Imagine Google’s search or YouTube becoming regulated monopolies, like electricity and water.
Facebook Inc., Google parent Alphabet Inc. GOOGL 1.85% and Amazon.com Inc. AMZN 0.38% are enjoying profit margins, market dominance and clout that, according to economists and historians, suggest they’re developing into a new category of monopolists. They may not yet be ripe for such extreme regulatory action, but as they consolidate control of their markets, negative consequences for innovation and competition are becoming evident.
For example, some who study the past compare Amazon and Facebook to Standard Oil, for their similar quests to vanquish competitors and even their own suppliers through vertical integration.
Google, Facebook and Amazon also bear resemblance to another monopolist of yore, the telegraph heavyweight Western Union , says Richard du Boff, emeritus professor of economic history at Bryn Mawr.
“What [Western Union] was always engaged in was clearing the field, getting rid of anybody who was in their way, either by takeover or other means. The main motive, as I see it, was market domination.”
Experts aren’t, however, lumping in Apple Inc. AAPL 0.60% with the new monopolists. Like Microsoft Corp. and Intel Corp. before it, Apple is considered more vulnerable to competitive disruption, despite the fact that it tops the tech world in revenue, profit and market capitalization.
One way today’s monopolists are different from the robber barons of old is that they’re not exactly behaving like, for example, Andrew Carnegie, who turned armed guards on striking workers. And regulators don’t particularly care if a company is a monopoly unless it harms the public or hampers innovation. But on those counts, many argue we’re close. Take the way both Google and Facebook dominate the harvesting of user data, or Facebook’s ethically dubious decision to release vast quantities of personal information to developers.
Facebook and Google
The reason your electricity comes from a regulated monopoly is that building a grid is expensive, but pushing more electrons to new customers is not. One condition for judging monopolies is how difficult it is for upstarts to challenge them.
Together, Google and Facebook take in 73% of U.S. digital advertising. It may not be something you think about often, but that success rests largely on the fact that both have spent so much money building data centers and filling them with hardware and software designed by an elite, in-demand set of engineers. In this way they resemble the telegraph giants, with investments in physical infrastructure so large no upstart could match them.
They also benefit from something historically unprecedented: the ability to get users to subsidize them with enormous quantities of free labor. Their systems are fueled by personal information, but instead of them hunting for it, people willingly provide it.
In addition, social media is a land grab, and Facebook is its most successful grabber, says Glen Weyl, a senior research scholar at Yale and a principal researcher at Microsoft Research, the company’s R&D lab. In basic function, it’s hardly changed in a decade, yet it’s made enough money to buy (Instagram, WhatsApp) or copy ( Twitter and Snapchat) its biggest competitors.
There is preliminary evidence that the size of the digital advertising pie could grow faster than Google’s and Facebook’s share of it. Research company eMarketer projected in March that their combined share of the ad market will fall for the first time ever.
“We face fierce competition as new technologies change the way people connect,” says a spokeswoman for Facebook. “Facebook is just one part of an ecosystem that includes dozens of messaging products, photo and video sharing apps, and many other services. Popularity does not equal dominance, and size is not a guarantee of future success.”
Amazon, in its sprawl and ambition, illustrates what monopolies look like in their early days, says Kim Wang, an assistant professor of strategy and international business at Suffolk University’s Sawyer Business School. Amazon seems determined to translate its dominance in cloud computing and online retail into dominance in physical retail, delivery of goods, voice-based computing and a half dozen other industries.
Amazon already accounts for 44% of U.S. e-commerce sales, and is showing rapid growth in categories where it previously foundered, like luxury goods and food. It’s convinced former competitors to get on board as partners, is vertically integrating everything from ordering to delivery—and could someday add manufacturing to the mix.
If Amazon’s rapid growth continues across all these lines of business, it’s hard to imagine it not eventually becoming a target for breakup.
Jeff Wilke, Amazon’s chief of worldwide consumer business, has said that in all the businesses it is in, Amazon has “incredible competition.”
“In world-wide retail, we’re less than 1%,” he recently told the Journal. “I don’t think any one of these areas is a football game where there’s only one winner.”
While Apple may be hoovering up the lion’s share of the mobile industry’s profits, the company is hardly a monopoly by measure of overall market share, say experts.
A “network effect” is when a product becomes more useful as more and more people use it—be it a fax machine or Facebook. For Apple, the size of its customer base attracts developers who in turn make the iPhone and iPad more valuable.
Microsoft once had a platform with similar dominance, and it was thought that the network effects of its large customer base and attractiveness to developers would help it stay dominant, says Catherine Tucker, a professor of management and marketing at MIT Sloan School of Management.
But we’ve got network effects all wrong, argues Dr. Tucker, and we failed to realize that they’re just as likely to empower upstarts to disrupt incumbents like Microsoft. Network effects helped smartphones like the iPhone quickly gain popularity, which marginalized Microsoft’s Office and Windows platforms.
Even Apple’s own iTunes takeover of the music industry proved to be a passing trend, as Spotify and other streaming services moved in.
Not everyone agrees that Facebook, Google or Amazon, as powerful as they are now, will need to be reined in.
“Today’s Amazon is tomorrow’s Macy’s , ” says Dr. Wang. “Very few companies will be able to position themselves for the new, next technology every time.” The technology that gives firms an edge eventually comes within reach of their competitors, she says.
In every monopoly-dominated industry in history, whether it was oil, railroads, steel or utilities, even the most avaricious competitors took decades to consolidate their hold on markets. Even at today’s faster pace, it’s probably still early days for tech giants.
“Companies go one of two ways—some are in areas where declining returns to scale set in and they get tamed by market processes,” says Dr. Weyl. “And other companies get tamed by getting turned into a public utility. And until they are, they reap extortionate profits.”