How the Internet is Changing Economics | Hacker News Reader

How the Internet is Changing Economics

asserttrue.blogspot.com

40 pointstechdog17 comments

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

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).

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

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.

It also lacks anything close to a significant sample size. His observations, and to be fair most of the response here, are purely anecdotal.

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.

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.

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.

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.

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.

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.

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.

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.

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

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.

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.

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

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