Is natural monopoly compatible with the internet ?
Monopoly (from the Greek monos meaning "one" and polein meaning "to sell") is, in its strict sense, a situation in which a single supplier has exclusive control over a given product or service for a multitude of buyers.
In popular culture, monopoly is often associated with efforts to break it up. These monopolies were frequently linked to "obvious" economies of scale : it would make little sense to build two water distribution networks (a "natural" monopoly). Economic theory has long debated their overall benefits, with well known frameworks such as the contestable monopoly theory, developed in the context of the Bell antitrust case.
However, some monopolies have existed for a very long time without being perceived as harmful : these were primarily infrastructure monopolies, often driven by public policy, such as rail, roads, electricity and telecommunications.
The end of natural monopolies
Recent developments have brought an end to most of these monopolies, either through regulatory changes or economic dynamics. Some still remain, particularly in infrastructure sectors (local loop, electricity transmission, railways). However, even in telecommunications infrastructure, competition is now widespread : access to the end customer (copper local loop) is no longer monopolistic thanks to alternative technologies such as radio (WiMAX, satellite), fibre or cable.
Moreover, mobile networks and heavy infrastructure (backbone networks) have demonstrated that monopoly no longer makes economic sense, as there is room for multiple competing infrastructures.
Natural monopoly therefore appears to be losing relevance today. Yet at the same time, monopoly is re emerging in other areas, taking on new forms that are worth analysing.
For example, the monopoly of standards (physical standards) :
In technology markets, the battle for standards is intense, and the loser typically loses everything. A recent example is the Blu Ray versus HD DVD format war, where strong alliances were formed between manufacturers and film studios to define the successor to the DVD. Blu Ray ultimately prevailed, resulting in significant losses for those who had backed its competitor.
The standard monopoly, the modern form of "natural" monopoly, appears almost irresistible. Attempts to impose proprietary formats in order to secure dominant positions have generally failed, as illustrated by Sony’s experience with memory cards for phones and cameras, where its Memory Stick lost out to the SD card. Despite significant investment, Memory Stick has virtually disappeared. Only Apple has partially succeeded in this approach, with technologies such as FireWire, which has managed to survive alongside the USB standard.
It is interesting to note that the technological advantages of challengers carry little weight against an established standard. The value of a standard is such that users often prefer a device compatible with the market over a more advanced but incompatible alternative. In this sense, the monopoly can be considered "natural".
The emergence of new digital monopolies
The rise of the internet and the shift towards an information driven society have reshaped the concept of monopoly : new, more diffuse forms of monopolistic systems are emerging. These can be structured from the most tangible to the most virtual :
- Platform monopoly (software)
When a standard monopoly is reinforced by a large and captive ecosystem, it becomes a platform monopoly. Operating systems (OS : Windows, Mac iOS, Android, Linux) are the archetypal example. While an operating system has intrinsic value (Apple’s OS may be perceived as more user friendly than Microsoft’s), its true value lies in its ecosystem, namely the software developed on top of it.
These layers of development represent such a significant investment for both developers and users that switching becomes almost impossible, leaving little room for multiple competitors. Microsoft leveraged this model with remarkable success through its operating systems (DOS then Windows) and its software suite (Office). This creates a compatibility driven monopoly : an Excel file can be read by the vast majority of users, and using it ensures that models can be shared and understood universally.
Similarly, Adobe has established strong dominance with formats such as Acrobat (PDF), as well as Photoshop and Illustrator in the field of graphic design. Competitors struggle to compete, as the ability to read PDF, PSD or AI files is essential for credibility.
On the internet, the battle has long been ongoing around Flash, but its relative heaviness, Apple’s resistance on mobile devices and the emergence of HTML5 have gradually led to its decline. The web, as a major force of standardisation, raises the question : will it eventually eliminate this form of monopoly ? For some time, it has been suggested that web layers and cloud technologies would enable universal access to any content from any device equipped with a modern browser. However, the differences between Windows and Mac versions of Excel illustrate how far this vision remains from reality, already challenged by the rise of new web platforms.
- Usability monopoly
Here, the focus shifts from compatibility to human behaviour, habits and learning. If users have invested significant time mastering a tool such as Photoshop, they are unlikely to switch, even if a new solution appears slightly better. When choosing which software to learn, individuals tend to select the standard, as it enhances their market value.
The cost of software itself is relatively low compared to the time required to master it, and choosing an alternative solution often limits usage to basic functionalities. While platform compatibility can sometimes be technically bypassed, the cost of retraining cannot. The benefits of monopoly increase rapidly : easier access to training, community support and the perceived "obviousness" of chosen solutions.
Once again, Microsoft and Adobe have excelled in this area, while Apple achieved a similar effect with the iPhone, whose ergonomic choices, initially innovative, have now become industry standards. This form of monopoly is more flexible than the previous one, yet potentially more powerful.
- Network monopoly (social)
A more recent development, network monopoly represents today’s key battleground for access to end users. The barrier to entry lies in the investment made by users in building their network and content. Facebook is the archetype, but platforms such as Google, MySpace, Skype, Twitter, LinkedIn, BBM and Flickr all converge towards similar functionalities : a unique identity, a network of connections, public interactions (status updates, likes), private communications (messaging), content sharing (photos, music), and applications.
Users find it difficult to publish across multiple platforms and manage them simultaneously. On the other side, platforms aim to build user loyalty and deep knowledge of their communities in order to monetise them through advertising. A more recent development is the recreation of platform monopolies through applications, such as games within Facebook, which can then be monetised.
- Recommendation monopoly, based on customer knowledge
The most recent and less visible form of monopoly is recommendation. There are two ways to generate recommendations : either by asking users explicit questions, or by already knowing their preferences. The latter is faster and often more relevant. However, acquiring this knowledge requires user identification and time.
This leads, once again, to a form of "natural" monopoly : if you are looking for movie recommendations, you have a strong incentive to consistently use the same platform to rate your preferences (Allociné, IMDB). The value of linking recommendation to transactions is clear, both for sellers and buyers.
The next step is even more powerful : if a platform understands your movie preferences, it is highly likely to recommend books, music and other products through segmentation and cross recommendation. Amazon has built much of its success on this model. As for Google, its strategy relies on offering services that require user identification, such as Gmail, in order to better understand users and deliver more relevant search results and targeted advertising.
So, natural monopoly, beneficial or unsustainable ?
What is particularly interesting is that consumers ultimately benefit from these monopolies : from public postal services to platforms like Facebook, monopoly often implies efficiency, at least in theory.
The associated risks are not new, they simply manifest differently. A classic risk is inefficiency due to lack of competition. This risk is less likely today given the openness and global nature of the internet. The other obvious risk is the abuse of dominant position.
Leaving legal considerations to specialists, abuse typically arises when one monopoly is leveraged to reinforce another : for instance, accepting Microsoft’s dominance in operating systems (monopoly 1), but facing aggressive promotion of its search engine (monopoly 4) can become problematic. Similarly, accepting Google’s dominance through network or recommendation services (monopolies 3 or 4), but being pushed towards its browser (monopoly 1), may be perceived as excessive.
Morand Studer
