On Digital Monopolies

A significant tendency to take into account when analyzing contemporary Internet developments is the one of monopoly creation. As McChesney  (2013 130) points out, it is indeed “supremely ironic that the Internet, the much-ballyhooed champion of increased consumer power and cutthroat competition, has become one of the greatest generators of monopoly in economic history”. Looking at the largest U.S. corporations in terms of market value, in 2014 three out of the top four companies are Internet giants: (1) Apple, (3) Google,  (4) Microsoft (number two in market value being the oil-giant Exxon Mobil).1

That is to say that the “Internet monopolists sit at the commanding heights of U.S. and world capitalism” (ibid.); reasons for this include the following:

  1. Network effects, referring to the increased gains experienced when a single resource or service is used by many, i.e. the capturing of customers creates demand-side economies of scale online. “Monopolies are actually even more likely in highly networked markets like the online world. The dark side of network effects is that rich nodes get richer”, resulting in winner-takes-it-all markets (Anderson 2010 online).
  2. The importance of technical standards, necessary for an effective and wide-spread use of any communication technology. The public interest would be to have such standards as open as possible, but in reality, the firms developing the technologies that eventually become the industry standards are off for a head start, e.g. Microsoft with Windows (McChesney 2013).
  3. The use of patents, providing temporarily government protection of a monopoly license as a reward for innovation, seeing an explosion of prominence since the digital era (e.g., Microsoft took a few hundred patent in 2002 and 2500 in 2010) (ibid.).
  4. Copyright law, acting in a similar manner and a discussion by itself, but “the belief that stronger intellectual property protection inevitably leads to more innovation appears broadly wrong”, acknowledging that innovation is a cumulative process (Bilton 2012 online).

The profitability of successful internet firms, explained by the factors above, rests elementarily on “establishing proprietary systems for which they control access and the terms of the relationship” (McChesney 2013 135). McChesney further draws the comparison to imagine the Internet as a planet where each monopoly is like a continent, resembling their monopoly base camp. Each empire then wants to be as self-contained as possible, drawing consumers into its world by offering an array of services and products, essentially to “gather extensive data in its cloud to be mined for prospective advertisers” (ibid. 140).

Mergers and acquisitions of smaller tech companies by big digital giants to increase their monopoly power and consequently ‘expand their empires’ are the state of the art and common practice online. A recent is the $19 billion takeover of the mobile messaging service WhatsApp with its more than 400 million users by Facebook, Inc.2

The value for Facebook in spending such a huge sum, $4 billion in cash and the rest in stocks, is hardly justified by the additional functionality; Facebook itself offers exactly the same comfort of exchanging messages and pictures already. Rather, it is in expanding its demographic user base on the background that Facebook itself has seen a drop in younger users recently, a group where WhatsApp is especially prominent, and, most importantly, Facebook is getting one potential future competitor from the table. As acknowledged by The Economist, one of the benefits of being a cash-flush giant is being “rich enough to buy up potential rivals”.3

Facebook pocketed $16 billion in cash resulting from its IPO in May 2012 and managed to do nearly two dozen acquisitions since 2010, of which the largest until now was the takeover of Instagram for $1 billion.4

This and countless other examples prove McChesney (2013 137) right when claiming that “today, the Internet as a social medium and information system is the domain of a handful of colossal firms.”

The question you should ask yourself is whether this development is desirable for a communication medium that has ever increasing significance and influence on personal lives as well as on society at a whole. If the answer is no, then we should probably do something about it. Yea, something.

References

Anderson, C., 2010. The Web Is Dead. Long Live the Internet. Wired, (18), pp.122–127. Available at: http://www.wired.com/magazine/2010/08/ff_webrip/all/.

Bilton, N., 2012. Disruptions: Innovations Snuffed Out by Craigslist. The New York Times. Available at: http://bits.blogs.nytimes.com/2012/07/29/when-craigslist-blocks-innovations-disruptions/.

McChesney, R.W., 2013. Digital Disconnect, New York: The New Press.

Footnotes

  1. U.S. Commerce – Stock Market Capitalization of the 50 Largest American Companies”. List usually subject to fluctuations, depending on the current stock price of the company.
  2. WhatsApp deal – Facebook snaps up messaging service in their largest acquisition,” The Guardian, February 20th, 2014.
  3. A Fistful of Dollars,The Economist, February 4th 2012.
  4. Facebook Buys Instagram for $1 Billion,” The New York Times, April 9th 2012.

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