Tag Archives: monopoly

Book Reviews, Technica

Creative Destruction

Internet_map

Author Andrew Keen ponders the true value of the internet in his new book The Internet is Not the Answer. Quite rightfully he asserts that many billions of consumers have benefited from the improved convenience and usually lower prices of every product imaginable delivered through a couple of clicks online. But there is a higher price to pay — one that touches on the values we want for our society and the deeper costs to our culture.

From the Guardian:

During every minute of every day of 2014, according to Andrew Keen’s new book, the world’s internet users – all three billion of them – sent 204m emails, uploaded 72 hours of YouTube video, undertook 4m Google searches, shared 2.46m pieces of Facebook content, published 277,000 tweets, posted 216,000 new photos on Instagram and spent $83,000 on Amazon.

By any measure, for a network that has existed recognisably for barely 20 years (the first graphical web browser, Mosaic, was released in 1993), those are astonishing numbers: the internet, plainly, has transformed all our lives, making so much of what we do every day – communicating, shopping, finding, watching, booking – unimaginably easier than it was. A Pew survey in the United States found last year that 90% of Americans believed the internet had been good for them.

So it takes a brave man to argue that there is another side to the internet; that stratospheric numbers and undreamed-of personal convenience are not the whole story. Keen (who was once so sure the internet was the answer that he sank all he had into a startup) is now a thoughtful and erudite contrarian who believes the internet is actually doing untold damage. The net, he argues, was meant to be “power to the people, a platform for equality”: an open, decentralised, democratising technology that liberates as it empowers as it informs.

Instead, it has handed extraordinary power and wealth to a tiny handful of people, while simultaneously, for the rest of us, compounding and often aggravating existing inequalities – cultural, social and economic – whenever and wherever it has found them. Individually, it may work wonders for us. Collectively, it’s doing us no good at all. “It was supposed to be win-win,” Keen declares. “The network’s users were supposed to be its beneficiaries. But in a lot of ways, we are its victims.”

This is not, Keen acknowledges, a very popular view, especially in Silicon Valley, where he has spent the best part of the past 30-odd years after an uneventful north London childhood (the family was in the rag trade). But The Internet is Not the Answer – Keen’s third book (the first questioned the value of user-generated content, the second the point of social media; you get where he’s coming from) – has been “remarkably well received”, he says. “I’m not alone in making these points. Moderate opinion is starting to see that this is a problem.”

What seems most unarguable is that, whatever else it has done, the internet – after its early years as a network for academics and researchers from which vulgar commercial activity was, in effect, outlawed – has been largely about the money. The US government’s decision, in 1991, to throw the nascent network open to private enterprise amounted, as one leading (and now eye-wateringly wealthy) Californian venture capitalist has put it, to “the largest creation of legal wealth in the history of the planet”.

The numbers Keen reels off are eye-popping: Google, which now handles 3.5bn searches daily and controls more than 90% of the market in some countries, including Britain, was valued at $400bn last year – more than seven times General Motors, which employs nearly four times more people. Its two founders, Larry Page and Sergey Brin, are worth $30bn apiece. Facebook’s Mark Zuckerberg, head of the world’s second biggest internet site – used by 19% of people in the world, half of whom access it six days a week or more – is sitting on a similar personal pile, while at $190bn in July last year, his company was worth more than Coca-Cola, Disney and AT&T.

Jeff Bezos of Amazon also has $30bn in his bank account. And even more recent online ventures look to be headed the same way: Uber, a five-year-old startup employing about 1,000 people and once succinctly described as “software that eats taxis”, was valued last year at more than $18bn – roughly the same as Hertz and Avis combined. The 700-staff lodging rental site Airbnb was valued at $10bn in February last year, not far off half as much as the Hilton group, which owns nearly 4,000 hotels and employs 150,000 people. The messaging app WhatsApp, bought by Facebook for $19bn, employs just 55, while the payroll of Snapchat – which turned down an offer of $3bn – numbers barely 20.

Part of the problem here, argues Keen, is that the digital economy is, by its nature, winner-takes-all. “There’s no inevitable or conspiratorial logic here; no one really knew it would happen,” he says. “There are just certain structural qualities that mean the internet lends itself to monopolies. The internet is a perfect global platform for free-market capitalism – a pure, frictionless, borderless economy … It’s a libertarian’s wet dream. Digital Milton Friedman.”Nor are those monopolies confined to just one business. Keen cites San Francisco-based writer Rebecca Solnit’s incisive take on Google: imagine it is 100 years ago, and the post office, the phone company, the public libraries, the printing houses, Ordnance Survey maps and the cinemas were all controlled by the same secretive and unaccountable organisation. Plus, he adds, almost as an afterthought: “Google doesn’t just own the post office – it has the right to open everyone’s letters.”

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This, Keen argues, is the net economy’s natural tendency: “Google is the search and information monopoly and the largest advertising company in history. It is incredibly strong, joining up the dots across more and more industries. Uber’s about being the transport monopoly; Airbnb the hospitality monopoly; TaskRabbit the labour monopoly. These are all, ultimately, monopoly plays – that’s the logic. And that should worry people.”

It is already having consequences, Keen says, in the real world. Take – surely the most glaring example – Amazon. Keen’s book cites a 2013 survey by the US Institute for Local Self-Reliance, which found that while it takes, on average, a regular bricks-and-mortar store 47 employees to generate $10m in turnover, Bezos’s many-tentacled, all-consuming and completely ruthless “Everything Store” achieves the same with 14. Amazon, that report concluded, probably destroyed 27,000 US jobs in 2012.

“And we love it,” Keen says. “We all use Amazon. We strike this Faustian deal. It’s ultra-convenient, fantastic service, great interface, absurdly cheap prices. But what’s the cost? Truly appalling working conditions; we know this. Deep hostility to unions. A massive impact on independent retail; in books, savage bullying of publishers. This is back to the early years of the 19th century. But we’re seduced into thinking it’s good; Amazon has told us what we want to hear. Bezos says, ‘This is about you, the consumer.’ The problem is, we’re not just consumers. We’re citizens, too.”

Read the entire article here.

Image: Visualization of routing paths through a portion of the Internet. Courtesy of the Opte Project.

Idea Soup

An Ode to the Monopolist

Peter Thiel on why entrepreneurs should strive for monopoly and avoid competition. If only it were that simple for esoteric restaurants, innovative technology companies and all startup businesses in between.

From WSJ:

What valuable company is nobody building? This question is harder than it looks, because your company could create a lot of value without becoming very valuable itself. Creating value isn’t enough—you also need to capture some of the value you create.

This means that even very big businesses can be bad businesses. For example, U.S. airline companies serve millions of passengers and create hundreds of billions of dollars of value each year. But in 2012, when the average airfare each way was $178, the airlines made only 37 cents per passenger trip. Compare them to Google which creates less value but captures far more. Google brought in $50 billion in 2012 (versus $160 billion for the airlines), but it kept 21% of those revenues as profits—more than 100 times the airline industry’s profit margin that year. Google makes so much money that it is now worth three times more than every U.S. airline combined.

The airlines compete with each other, but Google stands alone. Economists use two simplified models to explain the difference: perfect competition and monopoly.

“Perfect competition” is considered both the ideal and the default state in Economics 101. So-called perfectly competitive markets achieve equilibrium when producer supply meets consumer demand. Every firm in a competitive market is undifferentiated and sells the same homogeneous products. Since no firm has any market power, they must all sell at whatever price the market determines. If there is money to be made, new firms will enter the market, increase supply, drive prices down and thereby eliminate the profits that attracted them in the first place. If too many firms enter the market, they’ll suffer losses, some will fold, and prices will rise back to sustainable levels. Under perfect competition, in the long run no company makes an economic profit.

The opposite of perfect competition is monopoly. Whereas a competitive firm must sell at the market price, a monopoly owns its market, so it can set its own prices. Since it has no competition, it produces at the quantity and price combination that maximizes its profits.

To an economist, every monopoly looks the same, whether it deviously eliminates rivals, secures a license from the state or innovates its way to the top. I’m not interested in illegal bullies or government favorites: By “monopoly,” I mean the kind of company that is so good at what it does that no other firm can offer a close substitute. Google is a good example of a company that went from 0 to 1: It hasn’t competed in search since the early 2000s, when it definitively distanced itself from Microsoft and Yahoo!

Americans mythologize competition and credit it with saving us from socialist bread lines. Actually, capitalism and competition are opposites. Capitalism is premised on the accumulation of capital, but under perfect competition, all profits get competed away. The lesson for entrepreneurs is clear: If you want to create and capture lasting value, don’t build an undifferentiated commodity business.

How much of the world is actually monopolistic? How much is truly competitive? It is hard to say because our common conversation about these matters is so confused. To the outside observer, all businesses can seem reasonably alike, so it is easy to perceive only small differences between them. But the reality is much more binary than that. There is an enormous difference between perfect competition and monopoly, and most businesses are much closer to one extreme than we commonly realize.

The confusion comes from a universal bias for describing market conditions in self-serving ways: Both monopolists and competitors are incentivized to bend the truth.

Monopolists lie to protect themselves. They know that bragging about their great monopoly invites being audited, scrutinized and attacked. Since they very much want their monopoly profits to continue unmolested, they tend to do whatever they can to conceal their monopoly—usually by exaggerating the power of their (nonexistent) competition.

Think about how Google talks about its business. It certainly doesn’t claim to be a monopoly. But is it one? Well, it depends: a monopoly in what? Let’s say that Google is primarily a search engine. As of May 2014, it owns about 68% of the search market. (Its closest competitors, Microsoft and Yahoo! have about 19% and 10%, respectively.) If that doesn’t seem dominant enough, consider the fact that the word “google” is now an official entry in the Oxford English Dictionary—as a verb. Don’t hold your breath waiting for that to happen to Bing.

But suppose we say that Google is primarily an advertising company. That changes things. The U.S. search-engine advertising market is $17 billion annually. Online advertising is $37 billion annually. The entire U.S. advertising market is $150 billion. And global advertising is a $495 billion market. So even if Google completely monopolized U.S. search-engine advertising, it would own just 3.4% of the global advertising market. From this angle, Google looks like a small player in a competitive world.

What if we frame Google as a multifaceted technology company instead? This seems reasonable enough; in addition to its search engine, Google makes dozens of other software products, not to mention robotic cars, Android phones and wearable computers. But 95% of Google’s revenue comes from search advertising; its other products generated just $2.35 billion in 2012 and its consumer-tech products a mere fraction of that. Since consumer tech is a $964 billion market globally, Google owns less than 0.24% of it—a far cry from relevance, let alone monopoly. Framing itself as just another tech company allows Google to escape all sorts of unwanted attention.

Non-monopolists tell the opposite lie: “We’re in a league of our own.” Entrepreneurs are always biased to understate the scale of competition, but that is the biggest mistake a startup can make. The fatal temptation is to describe your market extremely narrowly so that you dominate it by definition.

Read the entire article here.

Technica

How to Get Blazingly Fast Internet

Chattanooga,_TennesseeIt’s rather simple in theory, and only requires two steps. Step 1: Follow the lead of a city like Chattanooga, Tennessee. Step 2: Tell you monopolistic cable company what to do with its cables. Done. Now you have a 1 Gigabit Internet connection — around 50-100 times faster than your mother’s Wifi.

This experiment is fueling a renaissance of sorts in the Southern U.S. city and other metropolitan areas can only look on in awe. It comes as no surprise that the cable oligarchs at Comcast, Time Warner and AT&T are looking for any way to halt the city’s progress into the 21st Century.

The Guardian:

Loveman’s department store on Market Street in Chattanooga closed its doors in 1993 after almost a century in business, another victim of a nationwide decline in downtowns that hollowed out so many US towns. Now the opulent building is buzzing again, this time with tech entrepreneurs taking advantage of the fastest internet in the western hemisphere.

Financed by the cash raised from the sale of logistics group Access America, a group of thirty-something local entrepreneurs have set up Lamp Post, an incubator for a new generation of tech companies, in the building. A dozen startups are currently working out of the glitzy downtown office.

“We’re not Silicon Valley. No one will ever replicate that,” says Allan Davis, one of Lamp Post’s partners. “But we don’t need to be and not everyone wants that. The expense, the hassle. You don’t need to be there to create great technology. You can do it here.”

He’s not alone in thinking so. Lamp Post is one of several tech incubators in this mid-sized Tennessee city. Money is flowing in. Chattanooga has gone from close to zero venture capital in 2009 to more than five organized funds with investable capital over $50m in 2014 – not bad for a city of 171,000 people.

The city’s go-getting mayor Andy Berke, a Democrat tipped for higher office, is currently reviewing plans for a city center tech zone specifically designed to meet the needs of its new workforce.

In large part the success is being driven by The Gig. Thanks to an ambitious roll-out by the city’s municipally owned electricity company, EPB, Chattanooga is one of the only places on Earth with internet at speeds as fast as 1 gigabit per second – about 50 times faster than the US average.

The tech buildup comes after more than a decade of reconstruction in Chattanooga that has regenerated the city with a world-class aquarium, 12 miles of river walks along the Tennessee River, an arts district built around the Hunter Museum of American Arts, high-end restaurants and outdoor activities.

But it’s the city’s tech boom has sparked interest from other municipalities across the world. It also comes as the Federal Communications Commission (FCC) prepares to address some of the biggest questions the internet has faced when it returns from the summer break. And while the FCC discusses whether Comcast, the world’s biggest cable company, should take over Time Warner, the US’s second largest cable operator, and whether to allow those companies to set up fast lanes (and therefore slow lanes) for internet traffic, Chattanooga is proof that another path is possible.

It’s a story that is being watched very closely by Big Cable’s critics. “In DC there is often an attitude that the only way to solve our problems is to hand them over to big business. Chattanooga is a reminder that the best solutions are often local and work out better than handing over control to Comcast or AT&T to do whatever they want with us,” said Chris Mitchell, director of community broadband networks at advocacy group the Institute for Local Self-Reliance.

On Friday, the US cable industry called on the FCC to block Chattanooga’s plan to expand, as well as a similar plan for Wilson, North Carolina.

“The success of public broadband is a mixed record, with numerous examples of failures,” USTelecom said in a blog post. “With state taxpayers on the financial hook when a municipal broadband network goes under, it is entirely reasonable for state legislatures to be cautious in limiting or even prohibiting that activity.”

Mayor Berke has dealt with requests for visits from everyone from tiny rural communities to “humungous international cities”. “You don’t see many mid-sized cities that have the kind of activity that we have right now in Chattanooga,” he said. “What the Gig did was change the idea of what our city could be. Mid-sized southern cities are not generally seen as being ahead of the technological curve, the Gig changed that. We now have people coming in looking to us as a leader.”

It’s still early days but there have already been notable successes. In addition to Access America’s sale for an undisclosed sum, last year restaurant booking site OpenTable bought a local company, QuickCue, for $11.5m. “That’s a great example of a story that just doesn’t happen in other mid-sized southern cities,” said Berke.

But it’s what Chattanooga can do next that has the local tech community buzzed.

EPB’s high-speed network came about after it decided to set up a smart electric grid in order to cut power outages. EPB estimated it would take 10 years to build the system and raised a $170m through a municipal bond to pay for it. In 2009 president Barack Obama launched the American Recovery and Reinvestment Act, a stimulus programme aimed at getting the US economy back on track amid the devastation of the recession. EPB was awarded $111m to get its smart grid up and running. Less than three years later the whole service territory was built.

The fibre-optic network uses IntelliRupter PulseClosers, made by S&C Electric, that can reroute power during outages. The University of California at Berkeley estimates that power outages cost the US economy $80bn a year through business disruption with manufacturers stopping their lines and restaurants closing. Chattanooga’s share of that loss was about $100m, EPB estimates. The smart grid can detect a fault in milliseconds and route power around problems. Since the system was installed the duration of power outages has been cut in half.

But it was the other uses of that fiber that fired up enthusiasm in Chattanooga. “When we first started talking about this and the uses of the smart grid we would say to customers and community groups ‘Oh and it can also offer very high-speed internet, TV and phone.’ The electric power stuff was no longer of interest. This is what what people got excited about and it’s the same today,” said EPB vice president Danna Bailey.

Read the entire story here.

Image: Chattanooga, TN skyline. Courtesy of Wikipedia.