Adapted from the 4th chapter of Exponential, by Azeem Azhar. Copyright 2021. Used with permission of the publisher, Penguin Random House UK. All rights reserved.
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For the first three decades of my life, there was a set of clear rules about how business worked. Dozens of very large companies dominated the economy, and each had a specialty. Exxon and BP invested in oil rigs and drew oil from the ground, selling it at a market price that was above the price of extraction. General Motors and Ford assembled raw materials and components, stitched them together and sold them for a profit. Successful companies grew bigger, by dint of better products or keener pricing. They might benefit from economies of scale – as they got bigger, their costs, relatively speaking, went down. But these companies also encountered forces that held them back.
As companies expanded and became more complex, managing them became like sorting through a mess of tangled wires – with too many contradictions resulting in slower and slower decision-making. This resulted in a counter- intuitive phenomenon – for established, large firms, it got increasingly expensive to get bigger. As size conferred both strength and weakness, competitors might be able to chip away at the advantage of the market leader. Dominance, in the twentieth century, was hard. In industry after industry, one could feel the gravitational pull of scale. It led to a phenomenon called diminishing marginal returns – that is, a decreasing return for every dollar a company invested. Companies would normally get to a certain share of a market and no bigger – two- fifths was about as good as it got. […]
Exponential technologies seem to imbue companies with powers that allow them to defy the force of gravity that held back firms of earlier generations.
Yet when we turn to the corporate titans of the Exponential Age - which I define as a wholly new era of human society and economic organisation, whereby the emergence of several new ‘general purpose technologies’, each improving at an exponential rate, is radically transforming our economy, politics and ways of life -, we see a very different picture. Google’s market share of search queries is almost 80 per cent in the US, 85 per cent in the UK, and nearly 95 per cent in Brazil. In the smartphone market, Android is installed on four out of five phones globally, with Apple’s iOS used on the vast majority of the others. No other operating system really figures. This dominance is even more pronounced among certain demographics and age groups. In the US, more than 85 per cent of teens own an iPhone. In online advertising, Facebook and Google between them account for more than 90 per cent of all global spend. […]
Exponential technologies seem to imbue companies with powers that allow them to defy the force of gravity that held back firms of earlier generations. Economists call this new type of firm the ‘superstar company’. The superstar company rises rapidly, seemingly unburdened by the forces that hold traditional firms back. It seems to be more productive, more aggressive, more innovative, and able to grow faster. It dominates markets that already exist and creates markets that didn’t exist before. Superstar firms get bigger and bigger, dominating one market, then the next. Many superstar firms are household names – Apple, Google, Uber, Facebook. They transform the markets they inhabit, turning them into fertile ground for themselves and parched deserts for their competitors. The brakes that slowed the growth of companies have been snipped. They have learnt to push past the law of gravity that once limited a company’s size. For superstar companies, the return on their investment grows as they get bigger. Ours is the first- ever age of increasing returns to scale. […]
The superstar company is not a fleeting trend but a wholly new economic paradigm. The corporate giants of the future will take increasingly dominant market positions, both within and across sectors. But is this necessarily a problem? A glance at recent history would suggest the answer is ‘yes’. In the twentieth century, dominant market positions tended to lead to monopolies. And monopolies were an issue. In the absence of competitors, companies might be tempted to offer customers a worse deal. Traditional monopolists often drove prices higher and took a laid-back approach to improving products and services – they might even use devious methods to prevent competitors from entering a market.
In the Exponential Age, troublesome dominant firms are more likely than ever – but the issues they pose are subtly different. They require a rethink of the way we think about monopolistic practices. In the 1970s, Robert Bork – the solicitor general of the United States under presidents Richard Nixon and Gerald Ford – came up with what became the standard approach to antitrust law, the body of US legislation concerned with monopoly. Bork’s emphasis was less on anti- competitive practices or cartel- like behaviour per se, and instead on consumer welfare. The question, in Bork’s view, was: will a company’s behaviour hurt a consumer’s pocket? A company’s size or market position was not, in itself, an issue – the implications for consumers were what mattered.
With this mindset, Bork – whose ideas were influential in both the US and Europe – may not have seen Exponential Age superstars as a problem. In the technology and internet sectors, it is far from clear that customers are getting a bad deal. Sure, Google and Amazon are tending towards monopoly in some sectors – but consumers aren’t being ripped off, at least not at first glance. The gift of exponential improvement means that the technology products improve every year for a fixed cost. […] In every area of the digital economy, the consumer experience seems to be getting cheaper and more efficient. So much for the perils of monopoly.
But there’s a catch. Robert Bork’s framework for understanding monopoly doesn’t account for the real issues created by monopolistic companies – at least not in the Exponential Age. There are problems with the new age of monopoly, but these problems don’t manifest themselves in the way our existing norms and rules can grasp.
The first problem is that instead of exploiting consumers, modern monopolistic businesses might exploit smaller-scale producers. Consider the App Store, through which many of us buy interesting apps for our iPhones. Apple, which makes the iPhone, also operates the App Store. And the company charges software developers to sell their products there. For small software developers making less than $1 million a year, those fees are 15 per cent per sale. For larger ones, 30 per cent. As of 2020, the platform hosts over 1.8 million apps, with gross sales in excess of $50 billion a year. But is that 15 (or 30) per cent take fairly earned? Or is it just the hefty protection money one has to pony up to the neighbourhood enforcer? […] The problem is that we can’t really know what a fair price is in the absence of a competitive market. In some segments of the economy, Apple is the market.
This leads to the second problem in this new age of monopoly. Economies that are dominated by large companies become progressively less dynamic. Bork’s theory of monopoly also struggles here. His framework accounts for price hikes within a specific sector, but not a wholesale loss of dynamism across an economy. But there are signs that just such a loss of agility is taking place in the Exponential Age. For even as new companies spring up, very large firms are increasingly adept at cementing their own position in that market – by buying nascent competitors when they are young. […]
Read more on the Forum Network: Don't Be Evil: How Big Tech Betrayed Its Founding Principles – and All of Us by Rana Foroohar, Author, FT Global Business Columnist
This has long-term consequences for innovation. Research shows that breakthrough inventions are more likely to come from individual inventors or smaller teams – one group of Ph.D. researchers analysed 65 million papers, patents and software products from 1954 to 2014, and found that ‘while large teams do indeed advance and develop science, small teams are critical for disrupting it’. And while a few companies take a very ambitious approach to research, the data suggests that those corporate giants can also come to narrow the focus of research in fields where they dominate. […] With the brain drain from universities to the private sector, research is at risk of becoming more and more narrow – increasingly focused on the commercial priorities of big companies.
And there’s a final problem with the tendency towards monopoly. Bork doesn’t mention it much, but companies are not just important to consumers – they are also part of the wider functioning of society. Most obviously, they are supposed to pay tax. And for the first giants of the Exponential Age, our tax codes have been generous. The bulk of the assets for Exponential Age firms reside in intangibles, and intangibles are prone to sliding across borders – and easier to slip past the taxman. […]
The problems posed by the ascendance of Exponential Age superstars are not intractable. In fact, we have the ability to answer them already. It just needs a change of mindset.
Yet for all their difficulty, the problems posed by the ascendance of Exponential Age superstars are not intractable. In fact, we have the ability to answer them already. It just needs a change of mindset. Above all, we need to develop a new way of thinking about monopoly.
For one thing, antitrust bodies need to be more confident about blocking big companies from acquiring smaller ones. […] The solution, perhaps, is for regulators to reserve the right to approve any acquisition by the largest companies, even of relatively small players. They might also be empowered to insist that an acquisition be sold off at some future point if it turns out to be troublesome. This approach would stop Exponential Age platforms buying up areas of the market.
But we might also seek to stop these companies growing so large organically. Here, a valuable idea is ‘interoperability’. Today, interoperability between platforms is all too rare. If you are a driver on Uber and you decide to move to a rival service, you will start there from scratch – without any customer ratings or reviews. It would be a little like getting a new fax machine and having to persuade all your clients to buy a machine of the same model so you can interact. Insisting on interoperability, especially for firms that get to a certain size, is one way of tampering the network effects that enable companies to get ever larger. […] The European Commission is taking the lead in this area: its Digital Markets Act, proposed in December 2020, puts new obligations on ‘gatekeeper platforms’ – the type of dominant network platforms we’ve been discussing – including compulsory interoperability between platforms.
And finally, we can limit the power of gargantuan Exponential Age firms by treating them less like ordinary companies and more like utilities – the essential services that we can’t avoid, like water, or the electricity network, or sewage pipes. Increasingly, digital firms fit this mould – they have become an inescapable part of our lives. […]
All of these policies are about closing the exponential gap. It is almost a gospel truth that markets tend to remain fairly competitive. Yet in the Exponential Age, that is a dangerous assumption. Politicians, business-people and regulators haven’t yet realised that we are entering the age of the winner-takes-all market.
Governments will, by their nature, operate more slowly than the fastest-growing companies. Yet between the worlds of academia and jurisprudence, think tanks and business forums, the policies that will close the exponential gap are at our fingertips. In every sector, people increasingly recognise that the era for which we made the rules has ended. And so the rules themselves must change.
Find out more about Exponential: How Accelerating Technology Is Leaving Us Behind and What to Do About It, by Azeem Azhar (Published in Sept. 2021, © Penguin Random House)
The OECD Competition Open Day will take place on 23 February 2022 —register now!
On the 23rd February, building on the work of the OECD Competition Committee in the last year, the OECD Competition Open Day will explore the role of competition policy in the green transition, competitive neutrality and the role of the State in the market, the interplay of regulation and enforcement in digital markets and the future of news media in the internet age. The Nobel Prize in Economics Joseph Stiglitz will give the keynote address. Finally, we will be launching the OECD Competition Trends as well as the OECD Digital Handbook on Competition Policy in the Digital Age.
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