Friday, 27 April 2018

The Business World Has Changed and We Can’t See It

by Georgia McKirgan

Despite all the discussion about the problems of Globalisation, it is undeniable that market competition and globalised supply chains have driven bigger improvements in human development in the last 30 years than in the last 300. Look at measures of hunger, absolute poverty, illiteracy, pollution  and childhood mortality. We haven’t seen anything like this in human history.

The central premise of this phenomenon has been competitive markets but the advent of tech titans like Facebook, Google, Apple and Amazon has fundamentally challenged this premise. These companies are all near-monopolies in the markets in which they operate. They have a scale and synergies that make it virtually impossible for competitors to enter their markets. Not only do they use their size to deter competition (do you know anyone that uses Bing instead of Google?) but they attack other markets. When Amazon announced they were buying the upmarket grocery chain Wholefoods, Amazon’s share price jumped by more than the purchase price. The market was actually PAYING Amazon to make the deal. At the same time, the value of all the other grocery chains declined by the same value. When Amazon announced they were getting into selling healthcare products, within 30 minutes, the market value of listed healthcare stocks declined by over $30 billion.

Investors have made so much money investing in these ‘network monopolies’ that companies with other business models have struggled to get investment. In the US, new business formation has been halved in the last 40 years and the number of companies listed on the stock exchange has declined by two thirds. These changes are also changing the way the economy looks...and not for the better. In 1980, the four largest companies in the US by market capitalisation were Exxon, General Motors, Ford and Mobil. Now 7 of the top 10 are Tech companies (Apple, Google, Microsoft, Amazon, Tencent, Alibaba and Facebook). Three of the titans of 20 years ago, P&G, Unilever and General Motors now have market capitalisation of $100 billion and 200,000 employees but Facebook alone now has a market capitulation of  $500 billion but only 25,000 employees. When Facebook bought WhatsApp for $19 billion, it only had 45 employees.

So consolidation and market concentration is stifling entrepreneurialism and competition with real effects on the economy but there is a solution and it has worked before.

Antitrust action. Government action to break up companies when they get too much market power.

These tech giants share their most valuable asset, information, vertically to expand their businesses and crush competition. Amazon use their data of customer buying trends to decide which own-label products to produce. What do you think would better for the economy? Amazon, Google, Apple and Facebook dividing up the spoils or Facebook vs Instagram vs WhatsApp vs Messenger? Apple vs iTunes vs iCloud? Amazon vs Amazon Web Services vs Amazon Fulfilment? Google vs YouTube vs Google Cloud? When large monopolies were broken up in the past, it released a wave of innovation. The best examples are the breaking up of Standard Oil at the beginning of the 20th Century and the breaking up of AT&T at the end of the century. The break up of AT&T was the catalyst for the collapse in the cost of long distance telephone services and probably gave us the mobile phone 10 years before it might otherwise have appeared if AT&T had been left alone. At the beginning of this century, it is clear that antitrust action against Microsoft was instrumental in the growth and development of Google and the internet as we know it.

The two obvious first steps are to prevent these monopolists buying new companies and preventing them from sharing their data across different markets. Ultimately, either the US government or the EU could break them up. In this respect Europe is ahead of the US. The EU was much more aggressive than US regulators at pursuing Microsoft at the beginning of the century and it looks as they are also being more aggressive at looking at Google and Facebook today. When markets are well designed, they produce amazingly efficient outcomes but left alone, they do tend towards monopoly and concentration. This is almost inevitable when modern tech companies have economies of scale and network effects like Google and Facebook. The government is the only player that can enforce good market design and won’t happen on its own. The world is what we make it but we need to open our eyes and see what the business world has become. Once we see the problem, we will realise that we have the tools to fix it. The economic and development gains of the last 30 years will be wasted unless we take steps to ensure that there is a level playing field for economic competition.

Not even Silicon Valley is immune to this slide in innovation. Do you know what the hottest new startup was in Silicon Valley last year, the place that has invented our modern world?

Air BnB for pets!

There is a problem, but we know how to fix it.

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