Sunday, November 14, 2010

This Just In: Tenured Professor Blasts Monopolies


The most incomprehensible treatise on business monopolies that we have read since…well, ever, appears in today’s online Wall Street Journal.

The treatise appears not, however, courtesy of an English professor—as one suspects when reading the half-baked argument that appears to originate more from a deep-seated distrust of the Internet and its most successful progeny, including Google and Facebook, than from an understanding of monopolies—but, as we find at the end of the column, “a professor at Columbia Law School.”

And a tenured professor at that.

For the moment we will leave aside the supreme irony that a tenured professor—i.e. a teacher who has been granted a monopoly on his or her area of expertise within a specific institution—hereby seeks to define the current leaders among the extremely competitive meritocracy otherwise known as Silicon Valley as “New Monopolists,” and reprint gist of the article itself:


In the Grip of the New Monopolists
Do away with Google? Break up Facebook? We can't imagine life without them—and that's the problem

By Tim Wu

How hard would it be to go a week without Google? Or, to up the ante, without Facebook, Amazon, Skype, Twitter, Apple, eBay and Google? It wouldn't be impossible, but for even a moderate Internet user, it would be a real pain. Forgoing Google and Amazon is just inconvenient; forgoing Facebook or Twitter means giving up whole categories of activity. For most of us, avoiding the Internet's dominant firms would be a lot harder than bypassing Starbucks, Wal-Mart or other companies that dominate some corner of what was once called the real world.


The Internet has long been held up as a model for what the free market is supposed to look like—competition in its purest form. So why does it look increasingly like a Monopoly board? Most of the major sectors today are controlled by one dominant company or an oligopoly. Google "owns" search; Facebook, social networking; eBay rules auctions; Apple dominates online content delivery; Amazon, retail; and so on.

Let’s start with the obvious howler—that “Google ‘owns’ search.”

While it is undisputable that Google dominates search, Google had, at last count—as anybody with a computer and an internet connection can find—66.1% of the U.S. search market, with Microsoft, Yahoo, Ask and AOL splitting the remaining 34%.

As anybody with a computer and an internet connection can find the definition of a monopoly, and as that definition includes “Exclusive control of a commodity or service in a particular market”; “the exclusive possession or control of something”; and “the market condition that exists when there is only one seller,” it is exceedingly clear to anyone with a computer and an internet connection that Google’s two-thirds share of the search market does not constitute a “monopoly.”

After all, nobody has to use Google to search for something online.

They can use Bing, or Yahoo!, or AOL, or Safari…. It’s just that Google works better for most people in this part of the world. (In China, on the other hand, Baidu is the preferred search tool, with 73% of the searches, while Google—the “New Monopolist”—straggles behind with 25%.)

Indeed, Google does not have “exclusive control” of search any more than Facebook has “exclusive control” of social networking: the professor seems to forget that people network socially every day—via MySpace, or Google Chat, or AOL Instant Message, or Twitter.

Why, people even network socially by telephone and standing in line at the Safeway, for that matter.

How is it, again, that Facebook has a “monopoly” on our social networking?

But our tenured professor doesn’t leave well enough alone and end his missive on this somewhat frightening—for a Law School professor—perspective on what constitutes a “monopoly.”

He instead aims his case to at even higher level—or lower level, as the case may be—by first arguing that monopolies would be okay if they could be “somehow restricted to, say, 10 years,” and then missing exactly the point of this entire exercise in brutal free-market competitiveness—i.e. that Google and Facebook and the rest are only as good as their technology platform, and that they will die when their advantages no longer attract the free choice of consumers:

We wouldn't fret over monopoly so much if it came with a term limit. If Facebook's rule over social networking were somehow restricted to, say, 10 years—or better, ended the moment the firm lost its technical superiority—the very idea of monopoly might seem almost wholesome. The problem is that dominant firms are like congressional incumbents and African dictators: They rarely give up even when they are clearly past their prime. Facing decline, they do everything possible to stay in power. And that's when the rest of us suffer.

African dictators and congressional incumbents do not get booted out of power when their “technical superiority” is lost: internet-based companies do.

Hence Amazon.com improved on eBay’s sales model and prospered; Google improved on Overture’s key-word bidding model and prospered; Facebook improved on MySpace’s social networking model and prospered...the list is too long even for this virtual column.

Nevertheless, while this survival-of-the-fittest world is a reality that even a tenured professor should grasp, he fails to grasp it.

And since the ferocious and wide-open technological meritocracy that dominates Silicon Valley today would not back up his weird theory, Our Tenured Professor must go all the way back to the telephone system founded by Alexander Graham Bell to attempt to prove his point—which he then backs up with an only slightly-more modern example from the Hollywood movie studio system of the 1930s:

AT&T's near-absolute dominion over the telephone lasted from about 1914 until the 1984 breakup, all the while delaying the advent of lower prices and innovative technologies that new entrants would eventually bring. The Hollywood studios took effective control of American film in the 1930s, and even now, weakened versions of them remain in charge. Information monopolies can have very long half-lives.

AT&T, of course, is no comparison to Google, Facebook or anyone else cited by Our Tenured Professor: AT&T was a true monopoly because there was no way to make phone calls other than on an AT&T line.

In other words, AT&T had 100% market share.

As for the Hollywood studio analogy—well, a quick perusal of the top movies of 2010 reveals seven movie studious splitting the top ten grossing movies thus far in 2010—hardly constituting anyone being “in charge.”

Thankfully, Our Tenured Professor concludes his dark, error-riddled vision with a relatively upbeat coda—albeit one that only serves to highlight the banality of his case:

The Internet is still relatively young, and we remain in the golden age of these monopolists. We can also take comfort from the fact that most of the Internet's giants profess an awareness of their awesome powers and some sense of attendant duty to the public. Perhaps if we're vigilant, we can prolong the benign phase of their rule. But let's not pretend that we live in anything but an age of monopolies.

Indeed, the internet is young. Facebook was founded all of six years ago. Google, 12 years ago.

Oh, and the dominant—one might say, monopolistic—search methodology (it was not precisely a search engine in those days) the year Google was founded happened to be Yahoo!

And as of September of 2010, Yahoo!’s “monopoly” had shrunk to 16.7% thanks to nothing so enlightened as a benevolent government or “sense of attendant duty to the public.”

Yahoo!’s decline was, in fact, due to fierce, ferocious, free competition in which one group of human beings dreamed up, built, executed and perfected a meaningfully better mousetrap that appealed to other human beings.

That is something tenured professors, who have jobs for life and no accountability to any bottom line, don’t seem to grasp.


Jeff Matthews
I Am Not Making This Up

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4 comments:

heartofdeepness said...

Unfortunately, I can already see the professor smugly pointing to the US and EU declaring Microsoft a monopoly using much the same flawed reasoning, as all the justification he could ever need.

Jeff Matthews said...

Heart of Deepness: if they do, it is meaningless to the argument.

Microsoft did have a monopoly. They had 100% market share of Intel-based desktop operating systems. That's a monopoly.

It has taken a long, but market forces are finally taking that monopoly apart--or at least making it less relevant

JM

But What do I Know? said...

Great takedown, Jeff. One wonders at the motivations behind the professor's screed--Steve Ballmer, perhaps. A good reporter should follow the money.

robcyran said...

Sad that the prof. took an interesting area and made such a dog's breakfast of it.

He is on track with the idea that tech tends to breed oligopolies/monopolies. That's what happens when you put together standards, network effects, high fixed costs and close to zero marginal cost for each additional user.

But he's way off track when saying these are durable - waves of innovation wash away these standards like lines of sand. Just look at what happened to the 70s computer firms outside Boston.

That said, these oligopolies/monopolies probably have costs that appear to grow over the medium run - they often seem to slow innovation and cause the firm that holds them to act like a dozy monopolist until the next wave of technology comes along. For example, how many Microsoft users grumbled but used Vista? Are customers happy with AT&T and Verizon? Or there cable company etc.? If not, why haven't these companies been overtaken by new rivals?

As for a ten year period for a monopoly, that's a waste of column inches.