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No, Every Big Internet Company Is Not a Monopoly

· December 16, 2016

Earlier this week, Hollywood veteran Jonathan Taplin’s misleading op-ed in the New York Times did us the favor of compiling the most common misconceptions about online competition in one convoluted package.  Unfortunately, Mr. Taplin’s piece tracks with recent zeitgeist, as some commentators and armchair economists increasingly reach for the “monopoly” label when beginning an analysis of Internet companies, rather than upon concluding it.  

Commentators like Mr. Taplin are wont to pick a major Internet company (or all of them), apply the monopoly label, and call for antitrust regulators to right some perceived wrong – never mind that the complaint often has nothing to do with competition law.

This isn’t competition law; it’s industrial policy.  In Mr. Taplin’s case, the evil that industrial policy must address is the alleged, unjust transfer of wealth from traditional content companies to “free-riding” Silicon Valley firms that do nothing for society (except being the leaders in research and development spending, which is a key driver of productivity and job creation).  And judging by the hyperbolic title of his forthcoming book, he appears to blame them for destroying culture and democracy as well.  Very subtle.

To bolster his argument, Taplin pulls a number for this wealth transfer out of his… well, out of thin air:

In the past decade, an enormous reallocation of revenue of perhaps $50 billion a year has taken place, with economic value moving from creators of content to owners of monopoly platforms.

“Perhaps,” indeed.

As awkward as self-serving pleas that the government transfer revenue from the technology industry to legacy content companies are, they are increasingly common in public policy forums (a development which coincides with a major content industry public affairs campaign).  

Defining Monopolies and Markets

At the outset, some baseline definitions are in order.  To be a monopoly a firm must have “exclusive control” of a scarce resource.  To loosen the definition, antitrust comes into play when a firm is said to be “dominant” or have “market power” in a discrete market.  A firm has market power when it can act independently of competitive influence of its rivals.  Mr. Taplin would have you believe that all of these firms (he cites Google, Facebook, Amazon and Apple) are dominant monopolies in the same “media distribution” market.

Look at all those “monopolies,” competing against one another.  Even if you remove legacy competitors from the calculation (which is silly), is he alleging they do not compete with each other?  What about Comcast, Verizon, or the attempted merger of AT&T and Time Warner, which is the nominal basis for Taplin’s editorial in the first place?  I’m pretty sure they all make a decent amount of money distributing media and content.  His main gripe seems to be that traditional content distributors face more competition than they used to — and that this is bad for society.  I respectfully disagree.

Mr. Taplin’s piece employs a common trick of sophistry employed by Internet pessimists, many of whom represent legacy content companies, in arguing that the Internet is overrun with monopolies that need to be reined in.  He juxtaposes the increasing revenue of Internet companies against the declining revenue of pre-Internet forms of content distribution, and claims this as proof of evil afoot:

Look at the numbers. Alphabet (the parent company of Google) and Facebook are among the 10 largest companies in the world. Alphabet alone has a market capitalization of around $550 billion….

Since 2000, recorded music revenues in the United States have fallen to $7.2 billion per year from $19.8 billion. Home entertainment video revenue fell to $18 billion in 2014 from $24.2 billion in 2006. United States newspaper ad revenue fell to $23.6 billion in 2013 from $65.8 billion in 2000.

The number of Internet users has grown more than 800% since 2000.  No one should be surprised that Internet companies are worth more than they were in 2000.  In increasing volumes, consumers are substituting online content for traditional offline content they once consumed.  

To put this absurd argument in historical perspective, this is akin to arguing that the declining revenue of buggy whip manufacturers is proof of automobile monopolies or that the decline in VHS sales is proof of DVD monopolies.  In fact, the Internet has given advertisers more avenues to reach their customers, as it competes with traditional television and newspaper publishers for ad dollars.  Newspapers losing classified ad revenue to Craigslist, Google and Facebook, is no different than in 1938, when radio surpassed magazines as the biggest recipient of advertising revenue.  This is not a competition problem.  It is a competition success.  If a company truly did have a monopoly on content distribution (and therefore the eyeballs for advertising), then one would expect advertising to get more expensive and the total advertising inventory to decrease as the monopolist (or, in Mr. Taplin’s case, monopolists?) would raise the cost of advertising inventory space to extract monopoly rents.  In fact, the opposite is happening.  The cost per click for Internet advertising, at least for Google – one of Taplin’s main villains in the piece,  is in a well documented precipitous decline.  At the same time, as industry stats illustrate, the total U.S. advertising spend continues to increase every year.  So advertisers are spending more, and paying less, which is exactly what you would expect in a highly competitive ecosystem.

To drive home his point about this alleged Internet company market power, he both references incredibly broad, amorphous market definitions (including the “media distribution” market and “content delivery” market) and incredibly narrow, economically irrelevant market definitions (the “mobile search market” and the “online advertising” market).  In fact, these claims are mutually contradictory.  If “content delivery” or “media distribution” are relevant markets, then “online music streaming” and “mobile search” must be a part of that larger market, and therefore you can’t monopolize them, any more than one can monopolize the market for films about rescuing kidnapped family members (looking at you Liam Neeson).  And if you were to argue that “online advertising” or “mobile search” are relevant markets, you would have to contend that advertising buyers don’t weigh all forms of advertising when figuring out how to spend their advertising budgets (which they do), or that consumers don’t substitute between various online services when looking for answers to their questions (which they also do).

The Forest for the Trees: Investment, R&D, and Content Creation on the Rise

Going through all of Mr. Taplin’s factual liberties would require me to spill more digital ink than readers of this blog will want to get through (although I have a more extensive paper on the general topic, if you are so inclined).  Given the sweeping nature of the charge that the Internet is being overrun by monopolists, it is helpful to step back and look at the big picture, lest one miss the forest for the trees.

In stagnant markets under the grip of dominant players, one would not expect to find robust investment, huge shares of revenue aimed at research and development, and dynamic entry of new competitors.  Online investment is at its highest levels in over a decade, and the Internet sector is growing its research and development spend faster than other industries. These macro indicators point to a highly competitive market.  The content space is booming too.  The indie filmmaking industry, for example, has a new lease on life after major investments from Amazon and Netflix.  A new “golden age” of television has commentators worrying that we have too much TV.  YouTube alone paid over a billion dollars to the music industry this year. And despite the claims of publishers, competition from Amazon’s ebooks has led to increased overall revenue for the publishing industry, and given more authors a chance to publish their works.  As a result, people with ebook readers are reading more books than they used to.  This doesn’t fit the cultural devolution narrative.

When Mr. Taplin claims that “[t]he rise of these digital giants is directly connected to the fall of the creative industries of our country,” he fails to note there is more content being created than ever by more people than ever.  And the total amount of money that is flowing into advertising to support that content is significantly increasing as well.  What he is really discussing is that prior creative industry gatekeepers — movie studios, broadcast networks, record labels and publishing houses — no longer enjoy their privileged position as the sole means for artists and authors to reach the general public, and are trying to equate their revenue streams as a proxy for “culture” and the “creative class” generally.  As Mike Masnick rightly pointed out in a recent report, the rise of the Internet has lead to consumers spending more money relative to their household income on consuming content and more artists and authors are being able to publish their works:

One of the key lessons in the gradual shift in market power in the entertainment industry these days is that the power of the old gatekeepers is declining, even as the overall industry grows.  The power, instead, had definitively moved directly to the content creators themselves, who no longer need to go through a very limited number of gatekeepers, who often provide deal terms that significantly limit the creator’s ability to make a living.

So, next time you read a screed about how the Internet is chock-full of monopolists killing our society and all we hold dear, keep calm, take a deep breath, apply a little bit of common sense, and carry on.

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.