Do we live in a winner-take-all economy?
Increasingly, commerce seems dominated by a few big firms. We use our iPhones to search for stuff on Google; we buy it on Amazon; and we tell our friends about it on Facebook. These tech titans provide everything we need, and they’re incredible profitable.
Normally, high profits would attract competitors, forcing down margins. Consumers would benefit, as companies vie for their business, either through lower prices, better service, or some other innovation. But that doesn’t seem to be happening. The tech giants just seem to be getting bigger and more dominant.
Our always-on, always-connected society is driving this. Network effects mean that when more people use iPhones, more developers want to create iPhone apps, which spurs demand for more iPhones. The same is true of Google: the more we use it to search, the better Google’s algorithm gets at sending us relevant information. And why bother with a social network that your friends aren’t connected to?
Winner-take-all neural network. Source: NIH
Do we need government regulation to save us from these natural monopolies? After all, when John D. Rockefeller used new technology to drive down oil prices, Standard Oil bought up or drove down its competition. But then Teddy Roosevelt signed new laws to break up the Standard Oil monopoly.
But government action isn’t always necessary. At the height of the dot-com boom, everyone was buzzing over the four horsemen of the internet: Microsoft, Sun, Oracle, and EMC. They dominated software, servers, databases, and storage. Three of these four are still around, but they’re not nearly as dominant as they were two decades ago. Despite their immense financial and personnel advantages, bureaucracy or mismanagement or bad decisions or new technology caused them to miss the latest tech trends and fall behind. The same thing has happened in retail sales or media or other areas.
Nothing fails like success. Success breeds arrogance, arrogance breeds complacency, complacency breeds failure. The dynamism of our economy comes from its constant innovation. Market dominance is like New England weather: if you don’t like it right now, stick around. It will change.
Douglas R. Tengdin, CFA