

How the Internet is Changing Economics - techdog
http://asserttrue.blogspot.com/2012/01/how-internet-is-changing-economics.html

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TomOfTTB
The problem with this article is he lacks any historical perspective. The
offline companies he quotes have all been around for a long time (relatively
speaking) and that contributes to their position.

For example, Coca-Cola existed for 17 years before Pepsi even came on the
scene. That's longer than all but two of the online "monopolies" he referenced
(see the "great new monopolies" link). Beyond that Pepsi has been around
fighting Coke for dominance for the past 100+ years.

Same with McDonalds (1955) and Anheuser-Busch (1852).

In all these stories the initial company had as much dominance as online
companies do now. Pepsi was founded by a guy who wasn't willing to pay Coca-
Cola's prices and realized he could produce Pepsi and sell it for half the
price of Coke while still making a profit (See "Twice as much for a Nickle")

On the tech companies you're already starting to see erosion in the older
monopolies. Windows is starting to see serious losses from increasing Mac
sales, Intel has been beating AMD back with a stick and even Google is having
to make improvements to keep Bing at bay.

So it will literally be decades before we can know if the author's thesis is
even remotely valid

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beberlei
I agree with this opinion. The author lacks historic perspective. New
successful businesses automatically are monopolies since they create new
markets. This can obviously be seen in tech nowadays since this is all
technogicially new.

Historically it was the same and these companies still benefit from their
competitive advantage (or were crushed by the state) just to name Standard
Oil, Bell/AT&T, BASF, Ford. Just over time did competititors take market share
from them, because they became huge beurcratic monsters (as all monopolies
do).

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jmesserly
Agree with parent and gp. Not only that, the article lacks an Econ 101
understanding of microeconomics. Most markets have a few big firms because of
the pervasive effect of economies of scale[1]--generally, bigger firms have
lower cost per unit. That's why 1-3 is common in many markets. (For an
interesting discussion of why it's socially advantage to have N>=2, see the
notion of "deadweight loss" that happens when there is only one firm[2]).

Article is right in one way: software is very different from physical goods.
The marginal cost of each additional unit of software is 0. And there's
evidence (such as appears frequently on HN) that a bigger firms do not
necessarily produce software more efficiently. I've always suspected the
software industry is more dominated by network effects[3], which has a similar
effect on the market as returns to scale: a small number of firms & high
likelihood of natural monopolies.

[1] <http://en.wikipedia.org/wiki/Economies_of_scale>

[2] <http://en.wikipedia.org/wiki/Deadweight_loss>

[3] <http://en.wikipedia.org/wiki/Network_effect>

~~~
nerfhammer
I think a big difference though is geographic segmentation. Pepsi could
dominate the Southwest and Coke could dominate the Northeast; there's no
reason why that would be true of amazon vs. buy.com.

We _do_ see that with internet companies only for national or language
boundaries, e.g. baidu in China, gumtree dominates in the UK vs. craigslist in
North Am, Yahoo beats google in some asian markets, Orkut is popular in
Brazil, etc, etc.

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jericsinger
Network-based business models have always tended toward monopoly (AT&T, ConEd,
and Western Union, to name a few early US examples). The internet doesn't
change this dynamic at all; rather, by providing the first (more or less) open
network in history, it simply removed what used to be the greatest impediment
to a networked business: the construction of the transmission network.

The internet hasn't "changed" economics, it's just enabled a specific type of
business model.

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akg
To a certain degree this is true. I think the major reason for why we see a
"winner-take-all" effect on the internet is because of data persistence.
Usually the usage pattern for brick-and-motor stores is that you visit it, get
what you need, get out. With online services, however, the more data a site
has, the more useful it becomes (e.g., social networks or Amazon's
recommendation system). I think people subconsciously realize this and start
to focus on one attractable service over another.

On the other hand, the ease of dissemination of products/services to users via
the internet makes it so that niche markets are more efficiently served. This
is usually harder to do with brick-and-mortar stores due to locality
constraints. So even though, there might be "one big winner" there seems to be
a growing market for niche products.

~~~
draggnar
I agree with you. While McDonald's can be the "winner-take-all" for food on
the highway, being able to serve smaller and smaller niches due to larger
distribution means that there may be only one winner for a very particular
product. This niche may well open up entire new markets for further products
and services. Instead of trending towards oligopolies I would argue that the
internet allows what would otherwise be a tiny unprofitable niche to develop
into an entire market on its own with related services.

~~~
akg
Exactly. I will also add that having one "winner takes all" is not necessarily
a bad thing. Think about Wikipedia. The reason it is so useful as a tool is
because it is the central portal for information retrieval and submission.

~~~
nerfhammer
It's a classic network effect. Wikipedia is popular because it is popular.
Because its popular it gets more users, with more users it gets more and
better articles written, with more articles written it gets more popular. Once
that critical mass is achieved its very difficult for anything else to provide
a better service.

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mathattack
What I think the author misses is how short lived these monopolies can be. AOL
was a near monopoly. So was Netscape. And Internet Explorer. So was Altavista.
Or was it Excite? Or Yahoo? Was it Nintendo that had the gaming console
monopoly or Sega? Wasn't there a great Scandanavian monopoly on phones? Until
there wasn't.

Companies can lock down their market for a generation, or perhaps half a
generation, but few hold onto it forever.

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jv22222
There are many examples of mature online businesess that dont have one winner.
For example, think of online project management systems like campfire -
hundreds of competitors with a very long tail.

~~~
drumdance
I was thinking the same thing. Then again, this is a B2B space. As an
entrepreneur I personally like B2B precisely because it's _not_ winner-take-
all.

In the late 90s I sold my B2B dot com to another B2B dot com. We made the
mistake of believing that, like the consumer dot coms, B2B companies should
grow at all costs and try to dominate the market. In the meantime a bunch of
smaller players took a more sensible approach.

Our company cratered, but most of those grow-at-a-sane-pace companies are
still around and very profitable.

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rrrazdan
The author asserts a weak correlation, yet does not explain the reason. Very
very flimsy argument, I would say.

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methodin
I wonder how being bought out, which is surely a far greater occurence in the
online world than the offline world, plays into this idea? If you consider
that perhaps the major players have bought between 10 and 30 other companies
then the opportunities are still abound, just different. I would tend to think
that to most people being bought out or absorbed is a suitable alternative to
the more difficult task of rising through building a sound business which
could take a half-decade or more. Thus I would agree that yes, the model is
different, but one is not necessarily more nurturing to opportunities than the
other.

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wisty
In the early days of automotive manufacturing, Ford was a monopoly. That's
just tech - it takes a long time to reach technological parity with someone
who has a 10 year head start. Microsoft and Yahoo have now almost caught
Google, and will claw back some customers. Apple and GNU/Linux and the BSD
crowd have more or less caught up with Microsoft (thanks to everything
important now being on the web). In another 10 years time, perhaps people will
buy a computer (slash TV) based on fashion and price, not OS features.

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krallja
Minor correction:

> In beer, you have 90% of the market controlled by just three companies:
> Anheuser-Busch, Coors Molson, and SABMiller.

Not since 2007. Now it's just 2 ventures:
<http://en.wikipedia.org/wiki/MillerCoors> and
<http://en.wikipedia.org/wiki/Anheuser-Busch_InBev>

