Barwise, Patrick

LSE Research Online

Why	tech	markets	are	winner-take-all‘Competition	is	for	losers.	If	you	want	to	create	and	capture	lasting	value,	look	to	build	a	monopoly’–	Peter	Thiel,cofounder	of	PayPal	and	PalantirIn	the	1960s,	IBM	dominated	the	mainframe	market.	It	still	does.	In	the	1980s,	Microsoft	and	Intel	dominated	the	PCsoftware	and	processor	markets.	They	still	do.	From	the	1990s,	with	the	World	Wide	Web,	the	winners	were	Googlein	search,	Amazon	in	e-commerce	and	Facebook	in	social	networking.	They	still	dominate	those	markets.	Since2007,	Apple	and	Google	(Android)	have	dominated	the	market	for	mobile	internet	operating	systems.Dominant	tech	companies	can	be	‘eclipsed	but	not	displaced’The	pattern	is	clear.	New	tech	markets	are	highly	competitive,	but	once	a	company	achieves	clear	market	leadership,it	is	almost	impossible	to	displace.	Instead,	the	threat	is	that,	at	some	point,	a	newer,	bigger,	adjacent	marketemerges,	dominated	by	another	player,	as	mainframes	and	PCs	have	been	overshadowed	by	online,	mobile	andcloud-based	technologies.	In	the	words	of	industry	analyst	Ben	Thompson,	dominant	tech	companies	canbe	‘eclipsed	but	not	displaced’.Why	are	tech	markets	so	concentrated	–	what	are	the	factors	that	make	them	‘winner-take-all’?	There	are	many.	Thefirst	four	reflect	economics	and	technology.Economics	and	technology1.	Traditional	economies	of	scale,	scope	and	learningMuch	of	the	tech	giants’	dominance	comes	down	to	traditional	economic	factors.	Digital	products	and	services	havehigh	fixed	costs	and	low-to-zero	marginal	costs,	leading	to	marked	economies	of	scale,	reinforced	by	significanteconomies	of	scope	and	learning.	For	instance,	AI	and	cloud-based	resources	can	support	a	wide	range	of	diverseactivities,	and	get	better	and	more	efficient	the	more	they	are	used.2.	Direct	(within-market)	network	effectsThe	value	of	a	communications	network	increases	disproportionately	as	it	expands,	bringing	in	more	other	people	foreach	user	to	connect	with	–	a	‘direct’	network	effect.	Obviously,	this	is	especially	important	for	social	media	such	asFacebook.3.	Indirect	(cross-market)	network	effectsLSE Business Review: Why tech markets are winner-take-all Page 1 of 3		Date originally posted: 2018-06-16Permalink: http://blogs.lse.ac.uk/businessreview/2018/06/16/why-tech-markets-are-winner-take-all/Blog homepage: http://blogs.lse.ac.uk/businessreview/Most	tech	companies	are,	at	least	to	a	degree,	‘platform’	businesses:	they	create	value	by	matching	customers	withcomplementary	needs,	such	as	software	developers	and	users	(Microsoft’s	MS-DOS	and	Apple’s	App	Store)	oradvertisers	and	consumers	(Google	and	Facebook).	These	network	effects	are	‘indirect’	because	the	value	toparticipants	in	each	market	(e.g.	diners)	depends	on	the	number	of	participants	in	the	other	market	(e.g.	restaurants)and	vice	versa.	Once	a	platform	dominates	both	markets,	indirect	network	effects	become	self-sustaining	as	users	oneach	side	help	generate	users	on	the	other.To	succeed,	new	platform	businesses	need	to	achieve	critical	mass	in	both	or	all	the	key	markets	simultaneously.The	failure	rate	is	high:	platform	start-ups	have	to	sustain	many	loss-making	years	and	many	never	achieveprofitability	as	standalone	businesses.4.	Big	data	and	machine	learningDigital	businesses	gather	data	relentlessly,	cheaply	and	efficiently.	To	exploit	it,	they	use	analytics,	increasinglyautomated	(‘machine	learning’),	mainly	to	drive	continuous	improvement	in	products	and	services,	pricing,personalisation	and	advertising	targeting,	leading	to	more	usage	–	and	more	data.		The	combination	of	big	data	andmachine	learning	amplifies	network	effects	and	returns	to	scale,	further	strengthening	tech	market	leaders’dominance	and	deterring	further	market	entry.Five	behavioural	factorsThese	economic	and	technology	factors	are	reinforced	by	five	less	widely	recognised	behavioural	factors.	Two	areon	the	demand	side:5.	Strong	user	brands	and	habitual	usageDigital	products	are	‘experience	goods’:	users	need	to	try	them	and	learn	about	them	to	judge	their	quality.	Well-known,	trusted	brands	are	essential	in	these	markets	to	encourage	trial	and	discourage	switching	to	a	competitor.Usage	becomes	habitual	or	even	addictive,	reinforcing	the	incumbents’	dominance.	Tech	brands	like	Amazon,	Appleand	Google	are	therefore	among	the	most	valuable	in	the	world.6.	Switching	costs	and	lock-inTech	companies	also	deploy	a	range	of	strategies	to	lock	users	in	by	making	it	difficult	or	costly	to	switch	to	a	rival.Incompatibility	between	providers	(‘walled	gardens’	–	for	example,	where	iOS	apps	do	not	work	on	Android),	non-portable	data,	time	invested	in	learning	a	particular	system,	service	customisation,	and	accruing	content	such	asplaylists	that	cannot	be	migrated,	all	discourage	switching.Finally,	at	least	as	important	as	these	demand-side	factors	are	three	supply-side	behavioural	factors:7.	Attractiveness	to	talentAs	well	as	having	powerful	consumer	brands,	these	companies	also	have	strong	employer	brands,	enabling	them	toattract	the	best	technical,	managerial	and	commercial	staff,	further	reinforcing	their	market	dominance.8.	Powerful	founders	and	hard-driving	corporate	cultureAll	the	tech	giants	have,	or	had,	strong,	capable,	hard-driving,	hands-on	founders	such	as	Jeff	Bezos,	Steve	Jobsand	Mark	Zuckerberg,	usually	with	a	majority	of	voting	shares.	Their	obsessive,	relentlessly	innovative	corporateculture	and	hyper-aggressive	tax	and	acquisition	policies	further	reinforce	their	continuing	market	dominance.9.	Geography	–	or	‘cluster	economics’Despite	earlier	expectations	and	the	claims	of	Brexit	enthusiasts,	geography	still	matters.	Google	(Alphabet),	Appleand	Facebook	are	all	based	in	Silicon	Valley	–	the	archetypal	innovation	cluster	–	as	are	Oracle,	Intel	and	Cisco	andmany	tech	start-ups.	Amazon	and	Microsoft	are	in	Seattle,	just	a	two-hour	plane	ride	to	the	North.Winners	take	all	–	and	keep	itLSE Business Review: Why tech markets are winner-take-all Page 2 of 3		Date originally posted: 2018-06-16Permalink: http://blogs.lse.ac.uk/businessreview/2018/06/16/why-tech-markets-are-winner-take-all/Blog homepage: http://blogs.lse.ac.uk/businessreview/Will	‘creative	destruction’	–	capitalism’s	ability	to	innovate,	destroy	and	reinvent	itself	–	eventually	take	care	of	thetech	giants’	market	dominance?	This	seems	unlikely.	A	challenger	to	Google	in	search	would	have	to	offer	anincentive	or	a	noticeably	better	experience	to	attract	users,	over	a	period	long	enough	to	break	their	googling	habit.This	would	take	years	and	cost	many	billions,	with	no	guarantee	of	success.	In	2013,	Microsoft’s	estimatedcumulative	losses	in	search	were	$11	billion.These	firms	do	face	some	direct	competition,	including	from	each	other,	but	it	is	hard	to	see	any	of	them	losing	theircore	market	dominance	anytime	soon.	(The	partial	exception	is	Apple	–	still	the	most	profitable	company	in	the	world,but	increasingly	challenged	by	Samsung	and	other	suppliers	of	high-end	Android	devices.)Is	there	a	problem?Google	users	pay	nothing	for	an	excellent	search	service,	while	search	advertisers	have	a	highly	effective	tool	thatdid	not	exist	20	years	ago,	for	which	they	pay	a	competitive,	auction-based	market	price.	This	situation	creates	a	newchallenge	for	regulators:	extreme	market	concentration	which	nonetheless	offers	customers	great	value	for	money.Responses	to	date	differ	between	Europe	and	the	US.	European	antitrust	legislation	focuses	on	ensuring	faircompetition,	reflected	in	the	Commission’s	June	2017	€2.42bn	fine	on	Google	for	‘systematically’	prioritising	its	ownshopping	service	over	rivals	in	searches.	US	legislation	focuses	more	narrowly	on	whether	market	dominance	leadsto	demonstrable	consumer	harm.	Because	the	dominant	tech	platforms	are	all	US-based,	this	is	likely	to	be	an	areaof	growing	transatlantic	conflict	in	the	future.♣♣♣Notes:This	blog	post	appeared	originally	on	LSE	Media	Policy	Project.	The	post	gives	the	views	of	its	author,	not	the	position	of	LSE	Business	Review	or	the	London	School	ofEconomics.Featured	image	credit:	Photo	by	Pixelkult,	under	a	CC0	licenceWhen	you	leave	a	comment,	you’re	agreeing	to	our	Comment	Policy.Patrick	Barwise	is	Emeritus	Professor	of	Management	and	Marketing	at	London	Business	School,and	contributor	(with	Leo	Watkins)	to	Digital	Dominance:	the	Power	of	Google,	Amazon,	Facebookand	Apple,	recently	launched	at	LSE.	Their	chapter	can	be	accessed	here.			LSE Business Review: Why tech markets are winner-take-all Page 3 of 3		Date originally posted: 2018-06-16Permalink: http://blogs.lse.ac.uk/businessreview/2018/06/16/why-tech-markets-are-winner-take-all/Blog homepage: http://blogs.lse.ac.uk/businessreview/

Why tech markets are winner-take-all

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Why tech markets are winner-take-all

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