Inside the Information Society: Should we fear monopolies?

Each week David Souter comments on an important issue for APC members and others concerned about the Information Society. This week’s blog post reflects on telecoms and Internet monopolies.

Once upon a time

When I first worked on ICTs, in the 1980s, most countries had telecoms monopolies. Almost everywhere, one business, usually state-owned, did everything to do with telecoms – from running networks to installing lines in homes and offices.

This was a time, of course, when telecoms were simple – before the age of mobile, before the Internet. Few people had telephones at home, even in some developed countries.

Since then we’ve seen the end of telecoms monopolies almost everywhere. State-owned networks have been displaced by private sector competition. Regulators have intervened to break up network monopolies, force dominant operators to interconnect with one another, and give customers more choice. New markets (like mobile) were introduced in almost all countries with competition in place from the start.

Why? Because competition’s been regarded – by social as well as economic liberals – as the best way of encouraging innovation, cutting costs, improving quality of service (with reservations where less profitable markets are concerned) and promoting diversity of information sources.

What about online services?

What matters to regulators isn’t monopoly per se, it’s market dominance. Does one company – or a small group of companies – have such a big share of the market that it/they can manipulate it in their interest?

From its early days, the Internet was seen as a place in which a thousand flowers (new services) could bloom (and compete for users). It’s still very open to innovation. But, at the same time, a few online services and businesses have gained high levels of market dominance.

Google has around 80% of the Internet search market round the world. Facebook and its affiliates WhatsApp, Instagram and Facebook Messenger are the four most popular three social networks outside China. Amazon has become the most powerful online retailer worldwide; Uber the dominant taxi-matching service. Amazon Web Services is the leading player in the cloud, followed by Microsoft, IBM and Google. Where these companies are not dominant, as in China, local alternatives are just as powerful in local markets.

Why has this happened? And should it worry us?

Why does network dominance arise?

Two reasons.

First, a lot of investment capital is needed to build a network or an online business that’s competitive around the world – big enough, that is, to build global brand value and reap economies of scale. It may be years before profits can be realised (as Uber is experiencing).

Deep pockets for investment and big traffic volumes are needed to succeed. There’s little space for more than a few businesses to thrive in such markets (though there may be scope for niche and local businesses); sometimes, in natural monopolies, there’s room for only one.

Metcalfe’s Law

The second reason’s summed up in what’s known as Metcalfe’s Law. Put technically, this says ‘the value of a telecommunications network is proportional to the square of the number of connected users of the system.’ Put simply, the more people use a network, the more useful it is to them.

Take a telephone network, for example. If it has two users, there is only one connection possible between them; with four users there are six; with five users, ten; and so on. If you, as a user, have to choose between two networks that are incompatible, one with 80% of those you want to connect with, the other with 20%, you’re almost sure to choose the former. So dominant networks tend to be self-reinforcing.

This is why communications regulators forced telecoms networks to interconnect with one another, to make sure that users of smaller networks could connect with those on larger networks. Without that, telecoms markets would have consolidated rather than diversified.

What about online services?

The same tendency towards market concentration happens with interactive online services.

A social network that has more users offers them more value than one with fewer users. To maximise their contacts (and make sharing as convenient as possible), most people choose the network that their friends use. Facebook pulled ahead of rivals such as MySpace to become the dominant social network; and its dominance makes it a magnet to new users.

It isn’t a monopoly. LinkedIn offers similar services but with specific appeal to business users. Newer competitors, like Snapchat, challenge it by offering services which have significant differences and appeal more to particular (and younger) user groups, though it’s acquired the most threatening of these (WhatsApp and Instagram). But competing with a dominant big player requires two things – fresh appeal and big investment.

The power of algorithms has a similar effect in other online markets. The more people use a search
engine like Google’s, the more data it can use to make its search results superior. More searches make for more advertising and more revenue, which in turn pay for the research and development that improve its algorithms still further. Uber can outflank competitors by having more cars on the street and more comprehensive data about what its users want to do.

Why worry about market dominance?

People worry about market dominance in communications networks for three main reasons.

The first anxiety’s about consumer value. Regulators seek to reduce market dominance in telecoms because powerful networks can exploit it in their own interests, rather than consumers’. Whereas competition, regulators believe, encourages innovation, investment in new markets, more access for less profitable customers, better quality services and lower prices. Without it, customers would pay more for less.

The second is about plurality. Media regulators aren’t just concerned with economic power. Ownership of print and broadcast media convey political power too. If control over the information that is published becomes concentrated in too few hands, it can reduce freedom of expression and political diversity. Worse, it can be used to manipulate public opinion and political decision-making.

The third anxiety’s about the risk that the concentration of market power will spread – that a company which is dominant in one area of communications will exploit that dominance to gain greater market power elsewhere, particularly where new technologies and services are concerned.

Do these anxieties apply online?

There are similarities and differences in each case here between old telecoms and new online services.

The business model of the biggest online services is different from that in telecoms. Google and Facebook earn their revenue from targeting advertising by leveraging users’ data. They’ll maximise their value to advertisers by offering end-users more and better services, which tends to add consumer value as well as gathering more data. Without adding value, they’d shed users.

The biggest online services regard themselves as platforms, not publishers or service providers. There are many questions about whether this is valid (see next week), but it raises different issues of plurality from those in mainstream media. So far, dominant services have sought to maximise content because that maximises value – and resulting revenue – from their point of view.

But the biggest Internet and IT companies are building market power in multiple communications markets, through research and development and through acquisitions. Amazon, Google, Microsoft and Apple are important players in the cloud, through their estates of data centres. Major Internet companies are deeply involved in developing next generation technologies, whether in access networks, data analysis, wireless technology, driverless cars or artificial intelligence. Where not involved directly, they buy up those that are, as part of corporate strategies to sustain market leadership into the future.

So what?

Two final points of difference from those old telecoms monopolies.

First, there’s a different relationship between today’s online market power and governance than was the case with telecoms. Today’s dominant players are global rather than national, focused on innovation more than infrastructure. They are much much harder to regulate, nationally or internationally, than were telcos like AT&T, BT and Deutsche Telekom. In particular, they’re unlikely to be broken up by regulators into separate businesses like AT&T was long ago (and BT is about to be in Britain now).

Second, there is constant innovation. A new technology or service can rise up quickly (as Google, Facebook, Twitter, Uber all have in their time). Some of these will challenge them. However, the capital investment needed to turn a new service into a global brand these days means that it’s much more difficult for upstarts to muscle their way to the top of today’s digital markets. They’re more likely to be bought up by a global brand en route.

At present, there’s a trend towards the concentration of market power online. That seems likely to continue. We should be more conscious of it, and its dangers, than we are.

David Souter is a longstanding associate of APC, and has worked for more than twenty years on the relationship between ICTs and public policy, particularly development, environment, governance (including Internet governance) and rights. David writes a weekly blog for APC, looking at different aspects of the Information Society, development and rights. David’s blog takes a fresh look at many of the issues that concern APC and its members, with the aim of provoking discussion and debate. It comments on current topics and international meetings, draws attention to new reports and publications, critiques assumptions and suggests alternative perspectives. The views are his own, not APC’s. We hope that they will stimulate discussion, and that others will contribute their ideas in complementary blogs in future. More about David Souter. Follow him on Twitter .
Image: "The past, the present”, by Damian Wojsław on Flickr Commons
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