Among the top most five expensive companies, four are technology monopolies. Unlike, Aramco, these companies have become so expensive due to their monopolistic situation in technology ability. The success of Microsoft, Apple, Tesla, Toshiba, Alphabet, Amazon, Facebook and many more are distilled from technology monopoly. As reported in WSJ, “Intangible assets accounted for more than 80% of the total $25 trillion in assets of S&P 500 companies as of 2018.” But through IP asset accumulation, how do companies attain monopolistic market power?
Despite the growing market, why does the number of competing firms keep falling? For example, in the hard disk market, there were 85 makers in 1984—but they fell to six in 2009. Similarly, Microsoft Word became the sole survivor in the competition war of more than 30-word processor makers in the 1980s. The number of firms in the competition race for 3D NAND flash memory has fallen from 20+ in the 1990s to six in 2022. But what are the forces in succeeding as technology monopolies? Does it happen all of a sudden, or is there a systematic pattern in gaining the market power to emerge as technology monopolies?
Underlying forces of technology monopoly
The most important force is the option of getting ideas in making products incrementally better and also cheaper–simultaneously. Upon leveraging this option firms producing and trading even conventional products can succeed to monopolize the market. For example, Rockefeller succeeded in monopolizing America’s oil business. He set up an R&D center for producing ideas and implementing them in exploring, producing, and refining oil. He succeeded to have a flow of ideas for increasing the success of finding oil reservoirs, producing more oil than before from the same reservoirs, and improving the quality of the refined oil.
Technological innovations, irrespective of their greatness, begin the journey in primitive form, producing no or loss-making revenue. Starting from Phonograph, and hard disks to the word processor and smartphone, this is true. Hence, technology monopoly does not emerge with the debut of inventions, and innovations. By the way, it’s also true that often a single company triggers the emergence of technological innovations, but generating a loss-making revenue.
For sure, we are not concerned about such a monopoly. For example, IBM was the first to release a hard disk in 1957 and a smartphone in 1994. But the customer base for 5MB hard disk, weighing 1 ton, was a handful—producing paltry revenue. Similarly, being the first in releasing the smartphone Simon, IBM suffered a loss and retracted from the market. Instead of being solo loss-making producers, we are concerned about monopolizing large technology innovation businesses, like the way Microsoft has done in a word processor or Apple has done in a high-end smartphone.
As opposed to sudden appearance due to collusion, inventions, or regulatory interventions, technology monopoly appears slowly along with the growth of innovations. It takes place due to leveraging of ideas in the form of scale, scope, externality, and vertical foreclosure effects.
Scale, scope, externality, and vertical foreclosure power technology monopoly
Although a single producer releases a technological innovation, a growing number of firms start entering the market for making a profit from growth potential. As ideas offer the opportunity of making products better and cheaper, a race starts picking up among the competing firms. In making products better and cheaper, scale advantage keeps growing. As a result, some of the firms start showing better performance than others, forcing poorer-performing firms to leave the market.
Technology progression keeps empowering innovating a family of products, creating the scope advantage. For leveraging, innovators keep performing commonality and variation analysis and forming the core asset for reusing among family members. But not all the competing firms keep taking the scope advantage equally. Hence, better performing firms keep gaining market power out of scope advantage. For example, unlike Nokia confronted with dozens of OS for smartphones, Apple developed the same core OS for its diverse products, like iPod, iMac, MacBook, and iPhone. As result, Nokia took a long, unpredictable time to respond to Apple’s iPhone debut, leading to its departure from the competition race.
The next attribute contributing to gaining market power for monopolization is externality effects, including the network effect. Smart innovators focused on designing their products to support the growth of 3rd party component plugins. By leveraging technology progression, they also start focusing on creating a network effect—a positive externality effect with the growth of customers. Hence, by showing better performance in creating a positive externality effect, smarter firms place competing firms in a disadvantageous position.
The last one is creating and leveraging platforms. By applying a vertical foreclosure strategy, platform-owning companies place competing firms in a weaker position. Hence, smarter firms keep leveraging technology progression in creating scale, scope, and externality effects, and applying vertical foreclosure strategy to form technology monopoly.
Examples of technology monopoly
Among the examples of technology monopolies Microsoft, Apple, Spotify, Google, Amazon, Toshiba, and Facebook are notable. By applying a vertical foreclosure strategy around the Windows Operating system and adding numerous features to the office suite, Microsoft emerged as a poster child of technology monopoly. As the cost of copying software is zero, Microsoft keeps adding all conceivable features to its office suite—leaving no pockets for the competing firms. Furthermore, it took the advantage of the Windows operating system to leverage the platform benefits. Hence, even upon being a late entrant, Microsoft emerged as a technology in the monopoly PC-based office computing market.
The second poster child is Apple. Upon converting mobile handsets from electronic gadgets to software-intensive devices, Apple embarked on adding numerous software features. Furthermore, it also focused on creating positive externality effects by opting for component plugins—through the App store. As a result, Apple has succeeded to monopolize the high-end smartphone market, forcing even market leader Nokia out of the mobile handset business.
Google and Facebook are recent emergences of technology monopolies. Both of them have been leveraging the network externality effects—bigger is better and cheaper. Furthermore, their three-party business model innovation has contributed to leveraging the network effect. Besides, software-based implementation of ideas has created immense supply side scale and scope effects in turning them into technology monopolies.
How to overcome monopolies
Instead of collusion and regulatory measures, technology monopolies emerge due to the race of pursuing ideas to keep increasing better value at a decreasing cost. Hence, the race of attaining technology monopoly has been a blessing for consumers. But once the monopoly state is achieved, the winner starts showing reluctance in investing in further enhancement. Particularly, monopolies prefer not to invest in high-risk reinvention, forming the creative destruction wave. But such investment is essential to keep opening the next path of growth. Hence, despite the beneficial effect of the monopoly race, society badly demands in destroying the monopoly of the mature wave by fueling the next wave of creative destruction. Hence, society should invest in basic research, and foster innovation and startups. Furthermore, measures should be taken to prevent the incumbent monopolies to buy startups pursuing the reinvention wave and burry them.