Does the arrival of the Internet mean the end of natural monopolies?

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The new digital monopolies – natural, beneficial or intolerable?

A monopoly (from the Greek monos meaning “alone or single” and polein meaning “to sell”) exists when a specific person or enterprise is the only supplier of a particular commodity.1

In popular culture, monopolies are generally associated with the campaigns that are launched to dismantle them.  These monopolies have often been linked to “obvious” economies of scale: creating two water distribution networks, for example, has no sense whatsoever (“natural” monopoly). Economic theory has long been debating their overall benefits, with famous theories emerging such as that of the questionable monopoly, a theory developed during the Bell antitrust suit. And yet some monopolies managed to enjoy a lengthy existence whilst appearing to seem harmless enough: this was essentially the case of infrastructure monopolies, often through political will: rail, road, electricity and telecommunications networks, etc.

The end of natural monopolies

Recent developments have ended the majority of these monopolies through either legal or economic means. A handful nonetheless remain, notably related to infrastructures (local loops, electricity networks, railway networks). But even telecommunications infrastructures are now characterized by near-omnipresent competition: access to the end-customer (copper local loop) is no longer monopolistic thanks to radio (WiMAX, satellite, etc.), fibre optics and cable networks. What’s more, mobile networks and “backbone” infrastructures have shown that monopolies have no economic sense, as there is more than enough room for several infrastructures.

It would consequently seem that “natural” monopolies have fallen from favour… But at the same time, monopolies are creeping into other fields and adopting new forms that we will now attempt to decipher.

Take the monopoly of standards, for example.

When it comes to new technology, there is always a huge battle for the market, with the loser generally losing absolutely everything: PAL versus SECAM, Blu Ray versus DVD HD, etc. It’s the “natural” monopoly of the modern world, which would appear to be ineluctable.  Attempts to impose a “proprietary” format generally result in failure, such as Sony with its Memory Stick that attempted to challenge the SD Card. Apple is the only who has just about managed to succeed, with Firewire, for example.

 The emergence of new digital monopolies

The arrival of the Internet and the transition to an information society have transformed the notion of monopolies: new, vaguer monopolistic systems are now beginning to emerge.  We have classified them from the most “real” to the most virtual.

1. Platform monopoly

2. Ergonomic monopoly

3. (Social) network monopoly

4. Recommendation monopoly


·         1. Platform monopoly

This is the monopoly of standards, backed up by a massive and captive ecosystem. Computer operating systems (OS: Windows, Mac iOS, Android; Linux…) would be the archetypal example. Add-on developments demand huge investments from developers and clients alike, meaning that it is now almost impossible to change things, and there is no room for huge numbers of players. Microsoft has exploited the situation with pure genius via its operating system (DOS followed by Windows) coupled with its software (Office).  It’s a monopoly of compatibility: an Excel file can be read by almost everyone; and by using it I’m sure that everyone will understand my template. Adobe, meanwhile, has managed to firmly establish its Acrobat format (pdf), as well as Photoshop and Illustrator for graphic creation tasks. Rivals just can’t compete; you have to be able to read a pdf, psd or ai file (the respective abbreviations for the aforementioned formats) in order to be credible. The war is not (yet) won as far as Flash is concerned, but the fact that it is relatively heavy, that Apple is putting up resistance for mobile devices, and that HTML 5 is now starting to emerge would appear to be sounding its death knell. But will this web format along with exchange formats (XML, to name but one) cause this type of monopoly to disappear?  For a good while now, we’ve been told that with the “web” layer and the “cloud” we can read anything from any workstation, as long as it is equipped with an up-to-date browser. However, you only need to look at the differences between the Windows and Mac versions of Excel to realize that this dream is far from becoming a reality, and that it is already being undermined by the arrival of new web platforms (cf. 3).

·         2. Ergonomic monopoly

There is more flexibility here than with the previous type of monopoly, but it is nonetheless more powerful. Specific types of software may well be capable of reading Photoshop format files, but the training investment required is such that I’d be better advised to spend my time training on “standard” packages, thereby boosting my value. At the end of the day, the cost of a software package is actually quite low compared with the amount of time required to master it, and choosing an outsider generally means its use is restricted to the most basic of tasks. And although platform compatibility is something that can technically be overcome, dual-training remains a must. The benefits add up extremely quickly when a product is monopolistic in nature: easy access to training, advice, “evidence” of how the chosen solutions work. Once again, both Microsoft and Adobe have been successful in this field, whilst Apple has hit the bull’s-eye with the iPhone, whose ergonomics, which were clearly a very judicious choice, have now become second nature.

·         3. (Social) network monopoly

On a slighter more recent note, the network monopoly is the modern-day battleground in terms of reaching clients. It is on a par with the previous type of monopoly, but the “consumer” investment comes from building up your network and content rather than your expertise. Facebook, Google +, MySpace, Skype, Twitter, LinkedIn, BBM, Flicker… all these websites share the same functionalities: a username, a network (friends, that need to be contacted, categorized, etc.), public communications (status, “like”, etc.), private communications (messaging), content (photos, music), apps, etc. It is extremely tricky for cybernauts to publish information on a range of different sites and successfully keep track of each one.  On the other side of the fence, the stake of building up a network is to generate loyalty and leverage member insight so as to then be in a position to “push” advertising and recreate a platform monopoly with the help of apps (games on Facebook, for example), which can then be monetized.

·         4. Recommendation monopoly, based on customer knowledge

The final, less visible, monopoly is related to recommendation. There are two different ways of making recommendations: I either ask you questions, or I already know your preferences.  The latter is quicker, and often more pertinent. But gathering knowledge takes time and relies on the person being identified. This in itself gives rise to a certain “natural” monopoly. If you are looking for film recommendations, it is in your interest to always log onto the same website in order to record your tastes. What’s more, the stakes of tying recommendations in with sales are fairly obvious, for retailer and buyer alike. The next time around, if the retailer knows what sort of films you like, he is more likely to be able to recommend books, or even music, and so on, thanks to segmentation and cross recommendation. Amazon’s success has been built on that very principle. Google’s strategy, meanwhile, is to offer services that can only be accessed by logging-on (Gmail). This allows the firm to get to know the user inside out and consequently display hand-picked results and targeted adverts when a “basic” search is carried out.

 So, natural monopolies, beneficial or intolerable?

It is interesting to note that all these monopolies exist in the first place purely in the consumer’s interest: from the public service provided by the post office to Facebook, monopoly means efficiency, at least in theory.

The risks are by no means new, they have simply started to express themselves in a slightly different way. A classic problem is inefficiency stemming from non-existent competition. This kind of problem is less likely to arise today following the arrival and globalization of the Internet. The other risk is, of course, the abuse of the dominant position.

We won’t get into the legal wranglings here – let’s leave that to the experts, suffice to say that abuse notably arises when there is a transfer from one monopoly to another: I can accept Microsoft’s monopoly of the OS market (monopoly 1), for example, but when the company tries to force its search engine on me (monopoly 4), I begin to find it intolerable. I’m happy to log onto Google to take advantage of monopolies 3 or 4, but when the company tries to force its browser on me (monopoly 1), I find that unacceptable.

Morand Studer

1: Wikipedia