Google, Amazon and Netflix Are A New Breed Of Monopoly; Same As The Old Breed

by Kaila Colbin, , Featured Contributor, (April 30, 2016)

The year is 1927.

You live in Chicago, where you’re about to open a small convenience store. You’ve carefully stocked the shelves, lovingly arranged the window displays, painstakingly painted your signage. You’re ready to open for business. There’s just one more thing to sort out: how to handle your garbage.

The choice, as it happens, is simple: there is no choice. There’s only one trash company. That charges you extortionately. And takes a percentage of sales. And who will happily leave your garbage bags on the street in front of your store, or pile other people’s garbage on top of it, or worse, if you don’t comply with their terms.

Monopolies aren’t necessarily or even typically criminal enterprises. But a lack of choice inevitably equals an imbalance of power. And when there’s an imbalance of power, typically one side gets, well, screwed.

Which brings us to this week’s Stratechery article, in which the ever-insightful Ben Thompson does a deep dive into aggregation theory and how it’s changed the rules for monopolies and anti-trust initiatives. He starts by looking at Microsoft’s historic antitrust battles — battles that ultimately were not the reason the company peaked.

“What ultimately undid Microsoft,” says Thompson, “was that even as Windows continued to have a monopoly on laptops and desktops the definition of a computer was dramatically expanded to include smartphones (and, to a lesser extent, tablets)… [T]he truth is Apple’s iPhone succeeded by being a very different product than Windows, and Android leveraged a very different business model; if anything Microsoft’s PC dominance meant their mobile failure was inevitable as the company was ill-equipped to think differently.”

No matter how entrenched the monopoly, in other words, it is always vulnerable to the entire market shifting direction, and antitrust regulators, by and large, play no part in that. But Thompson goes on to explore the new face of monopolies: aggregators.

“Consumers are attracted to an aggregator through the delivery of a superior experience, which attracts modular suppliers, which improves the experience and thus attracts more consumers, and thus more suppliers in the aforementioned virtuous cycle… [T]he big get bigger; indeed, all things being equal the equilibrium state in a market covered by Aggregation Theory is monopoly: one aggregator that has captured all of the consumers and all of the suppliers.”

Think Google. Think Amazon. Think Netflix. They are not the only game in town — you can easily find someone else to process your search request, sell you a book, stream you a TV show. But they are the best game in town. They have all the searches, all the books, all the TV shows.

This is a key difference, explains Thompson. Historical monopolies controlled supply, distribution and infrastructure. Aggregator monopolies are created by their customers: if we all turn to Netflix because it is the best supplier, eventually everyone else will go out of business.

But why is this a bad thing? If an aggregator wins because it provides a better product or better service, surely it deserves to win?

Maybe so. But an aggregator that wins — that becomes the only game in town — in turn becomes the only customer for all the suppliers it has aggregated.

Suddenly, every web developer is turning herself inside out to optimize for Google search. Every bookseller is forced to accept every change in terms that Amazon rolls out. Every content producer is forced to comply with Netflix’s distribution strategy and monetization strategy. The customers may be getting a good deal, but there’s still a power imbalance in this ecosystem. And when there’s an imbalance of power…

For in-depth commentary on the tech sector, I highly recommend Stratechery — and I don’t get paid to say that.

The year is 1927.

You live in Chicago, where you’re about to open a small convenience store. You’ve carefully stocked the shelves, lovingly arranged the window displays, painstakingly painted your signage. You’re ready to open for business. There’s just one more thing to sort out: how to handle your garbage.

The choice, as it happens, is simple: there is no choice. There’s only one trash company. That charges you extortionately. And takes a percentage of sales. And who will happily leave your garbage bags on the street in front of your store, or pile other people’s garbage on top of it, or worse, if you don’t comply with their terms.

Monopolies aren’t necessarily or even typically criminal enterprises. But a lack of choice inevitably equals an imbalance of power. And when there’s an imbalance of power, typically one side gets, well, screwed.

Which brings us to this week’s Stratechery article, in which the ever-insightful Ben Thompson does a deep dive into aggregation theory and how it’s changed the rules for monopolies and anti-trust initiatives. He starts by looking at Microsoft’s historic antitrust battles — battles that ultimately were not the reason the company peaked.

“What ultimately undid Microsoft,” says Thompson, “was that even as Windows continued to have a monopoly on laptops and desktops the definition of a computer was dramatically expanded to include smartphones (and, to a lesser extent, tablets)… [T]he truth is Apple’s iPhone succeeded by being a very different product than Windows, and Android leveraged a very different business model; if anything Microsoft’s PC dominance meant their mobile failure was inevitable as the company was ill-equipped to think differently.”

No matter how entrenched the monopoly, in other words, it is always vulnerable to the entire market shifting direction, and antitrust regulators, by and large, play no part in that. But Thompson goes on to explore the new face of monopolies: aggregators.

“Consumers are attracted to an aggregator through the delivery of a superior experience, which attracts modular suppliers, which improves the experience and thus attracts more consumers, and thus more suppliers in the aforementioned virtuous cycle… [T]he big get bigger; indeed, all things being equal the equilibrium state in a market covered by Aggregation Theory is monopoly: one aggregator that has captured all of the consumers and all of the suppliers.”

Think Google. Think Amazon. Think Netflix. They are not the only game in town — you can easily find someone else to process your search request, sell you a book, stream you a TV show. But they are the best game in town. They have all the searches, all the books, all the TV shows.

This is a key difference, explains Thompson. Historical monopolies controlled supply, distribution and infrastructure. Aggregator monopolies are created by their customers: if we all turn to Netflix because it is the best supplier, eventually everyone else will go out of business.

But why is this a bad thing? If an aggregator wins because it provides a better product or better service, surely it deserves to win?

Maybe so. But an aggregator that wins — that becomes the only game in town — in turn becomes the only customer for all the suppliers it has aggregated.

Suddenly, every web developer is turning herself inside out to optimize for Google search. Every bookseller is forced to accept every change in terms that Amazon rolls out. Every content producer is forced to comply with Netflix’s distribution strategy and monetization strategy. The customers may be getting a good deal, but there’s still a power imbalance in this ecosystem. And when there’s an imbalance of power…

For in-depth commentary on the tech sector, I highly recommend Stratechery — and I don’t get paid to say that.

MediaPost.com: Search Marketing Daily

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