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How Competitive Is the Tech Industry?

· July 29, 2019

One of the biggest concerns in tech policy is trying to understand just how competitive the tech industry really is. Looking at reported market shares, the answer might seem easy. But tech remains a rapidly evolving market, and there are many characteristics of the industry that push back against the notion that market share is a perfect indication of market power. One major factor is the problem of how markets are even defined. In considering competition in the advertising market, is it proper to look only at the online advertising market or is it better to look at the entire advertising market? How do we take account of the heavy competition between digital and print publishers for advertisements?

Defining markets can be tough in tech

There are two issues with drawing lines around tech markets, and then using those market shares as the main predictor of competitiveness. First, the role tech products play in society can shift as they evolve, suddenly becoming competitors to other products and services in markets which previously seemed unrelated. Netflix was a mail order DVD company that became a streaming company and eventually a content producer. It has been called the ultimate digital disruptor, and established entertainment companies are changing to adapt to the entertainment market in the wake of Netflix’s disruption. And now, video games are becoming competitors to TV and streaming video services, disrupting the disruptors.

We can expect future tech evolutions as well. For example, smartwatches are currently a complement to smartphones. But these devices are already starting to integrate LTE technology and can make calls and perform other functions independently. Smartwatches could one day directly compete with smartphones, especially if there are changes in technology or consumer preferences that make smartwatches more appealing. This kind of shift from complement to substitute has already happened. Mobile computing has become a near complete replacement to desktop computing for some. Mobile web browsing overtook desktop for the first time in 2016, and has been the more popular way to access the internet for most of the time since.

Second, most prominent tech companies offer a basket of both related and unrelated products and services. It can be hard to draw lines around these products when engaging in competition analysis. For example, is search everything you’d type into a search box? Or are there separate markets for things like product search, local search, or answer engines like Wolfram Alpha? In other words, do consumers demand a packaged product or something where they can substitute each function? This question played out in the D.C. Circuit Microsoft case. One of the claims against Microsoft was that it engaged in unlawful tying of its browser to its operating system, but Microsoft argued it was all one product. The Court had difficulty resolving this question due to the complicated nature of the case. Although the Court determined Microsoft’s browser and operating system were separate products, it found merit to the argument that bundling and integration can be valuable to consumers and the advancement of technology. 

The D.C. Circuit’s trouble with the tying question is not unexpected. The tech market is confusing because most products are made up of components that can also be shopped for independently. There are consumers that want a complete experience given to them in the simplest way possible and consumers that want to customize their experience with the best product or feature for themselves in every class. This can make markets hard to define, and many consumers fall somewhere in between.

Consumers can also change their behavior based on the state of technology and other market forces; The desktop consumer market provides a good example of this. For many, the desktop computer is the product. For some, the product is each individual component that they can buy separately, based on their needs, and assemble at home. These might make up separate markets, they might not. Even if they do, these markets can suddenly shift. For example, cryptocurrency created a new demand for video cards, which are well suited for mining cryptocurrency, that caused a price shock. This shock also had strange effects on pre-assembled products. At one point video card docks, a product marketed to laptop users, actually became a cheaper way to buy video cards because they could just be removed from the dock. The dock units with the cards were less expensive than the video card alone.

How competitive is the tech industry?

These traits of the tech industry make measuring competition challenging. By some metrics, competition is poor. By others, competition is robust. Some tech companies tend to be very different from each other as a whole but can compete vigorously in different product or service categories. For example, Android has by far the biggest overall install base, but Apple seems to own the high income market. This could be why average app revenue has been much higher on iOS. This nuance means that there is much stronger competition for app developers than one would expect from looking purely at shares of mobile operating system installs.

New companies have also been able to carve out successful markets and challenge established tech firms in specific categories. The Atlantic called TikTok the biggest star of YouTube’s VidCon, and perhaps for good reason. It’s the third most installed app worldwide. Indeed, it was TikTok that gave us the summer’s biggest hit – Lil Nas X’s Old Town Road. The song was originally released independently and gained its popularity on TikTok. That led to a deal with Columbia Records, and now the single is dominating worldwide.

Other young companies are bringing fierce competition to narrow products that may generally be seen as features in other companies’ offerings. Dropbox, for example, is a successful cloud backup and file sharing company. There are cloud storage services provided by Apple, Google, and Microsoft as part of other products, and yet Dropbox still managed to double its revenue to $1.2 billion from 2015 to 2018. Slack is also doing well providing what is essentially just a messaging platform, something that has been offered as part of other services since AOL Instant Messenger. But Slack focused on a new experience, providing the simplest and easiest way for teams to collaborate and engage in high volume chat. Microsoft has made a strong push to compete by bundling its messaging service with Office 365, but Slack CEO Stewart Butterfield said he wasn’t worried and compared the effort to Bing or Google+.

Tech doesn’t display the typical symptoms of monopolies

There is one other problem with writing big tech off as simple monopolists. Monopolists are generally known for their laziness, it’s one of the key consumer harms antitrust laws seek to protect against. Their quality drops, their prices rise, and they innovate less. There is very little motivation for a company to develop and release a new product when consumers have no choice but to buy their current product.

However, the biggest R&D spenders worldwide are fairly consistently large tech companies. Amazon and Alphabet top the list with Apple, Microsoft and Facebook not far behind. What’s more, many of these companies greatly increased their R&D spend from 2017 to 2018. Amazon’s R&D spend jumped from $16.1 billion to $22.6 billion, and Facebook’s from $5.9 billion to $7.8 billion. So if these companies face no competition, what are they spending to get ahead of? Amazon and Google are also the most loved brands of 2019, which doesn’t seem to indicate that they are skimping on quality or charging outrageous prices. Michael Mandel of the Progressive Policy Institute found that tech seemed to outperform the rest of the private sector on certain competitive factors.

What does this data tell us? One answer could be that big tech is afraid of being replaced by the next big thing. New technologies can claim markets in ways that are hard to predict and the innovation process usually brings disruptive new products and services to the markets. Voice assistants, for example, could replace many searches that consumers would ordinarily do through the search bar. [1] [2] Or maybe they won’t, and it will be a different technology that incumbents have to worry about. It could even be something that seems straight out of science fiction, like Elon Musk’s company that promises to build direct computer-brain interfaces.

BBC writes about another rising competitor – applications. Many companies are creating apps with new ways of interacting with data, like Tinder’s swipe function or Netflix’s recommendation engine. Companies like Uber and Lyft use their own algorithms to match drivers and riders. These applications allow access to information directly and used without any assistance from other internet onramps like Google Search, meaning less search bar searches are needed.

Maybe the main reason big tech seems so unbeatable is that they continue to compete based on the fear that they will get replaced in the same way they unseated other companies to get where they are now. Whether real or imagined, having companies compete to stay where they are isn’t a bad thing for consumers as long as they aren’t blocking new companies from getting their chance to try to win the market.

Competition

Some, if not all of society’s most useful innovations are the byproduct of competition. In fact, although it may sound counterintuitive, innovation often flourishes when an incumbent is threatened by a new entrant because the threat of losing users to the competition drives product improvement. The Internet and the products and companies it has enabled are no exception; companies need to constantly stay on their toes, as the next startup is ready to knock them down with a better product.