IDU | Budgeting Forecasting and Reporting Solutions: January 2020

Thursday, 16 January 2020

Entrepreneurs vs monopolists

Reining in the entrepreneurial instinct to dominate a market forever

Man in suite on a rocket ship

There’s a fascinating contradiction at the heart of entrepreneurship. High levels of competition encourage innovation, create opportunities and make economies more productive—so competition, on the whole, is good for entrepreneurship. For individual entrepreneurs, on the other hand, competition is something to be discouraged, pre-empted, squashed and otherwise eliminated as quickly possible. Most entrepreneurs would be monopolists if they could.

Now that seems to be a sweeping statement! But it is really a very natural and reasonable position. It makes sense that those who take risks want to maximise their rewards. Reaping the benefits of innovation and securing intellectual property rights has been one of the primary concerns of inventors and entrepreneurs at least since the very early days of the industrial revolution. Luminaries like steam engine inventor James Watt spent at least as much of their time-fighting patent battles as they did working on their designs. Intellectual property law recognises that creation is much harder than copying, and that if a society wants to encourage innovation it needs to give inventors a limited period of monopoly so they can be appropriately rewarded.

The keyword there, however, is “limited”. At some point reaping the rewards of one’s ingenuity tips over into obstructing the next wave of innovators and yesterday’s nimble upstarts become today’s stodgy and anticompetitive incumbents.  This process has speeded up along with everything else, so that the turnaround seems to have shrunk to a few years.

There are strong signs that the US economy, a critical engine of innovation for the whole world, is starting to suffer from over-powerful incumbents. New firms—the ones responsible for the highest rates of innovation and job creation—are starting up at a lower rate than old ones are shutting down, and the share of industry profits that goes to the largest firms is increasing. This has ramifications far beyond the borders of the US: Firms like Amazon, Facebook and Google are not accountable to lawmakers or electorates in the rest of the world, and yet decisions made in Seattle and Silicon Valley profoundly affect all of us.

There are legislative solutions for this problem. The antitrust case brought against Microsoft in 1998 helped to unlock a new wave of innovation that enabled the rise of, yes, Amazon, Facebook and Google. All of these are now beginning to abuse their powers in ways that are variously harmful to consumers, workers and societies, and there is growing pressure for these new incumbents to have their own Microsoft moments.

It is a battle worth fighting. The Microsoft case proved yet again that when a monopoly is restrained from putting up unreasonable barriers to entry, for example through predatory pricing, there are always going to be new competitors just waiting to be given a fair chance. As new firms enter the market they will all be under competitive pressure to make better products and a better product will always win market share.

The online conferencing market is a case in point. Driven by the ever-increasing need to communicate across time zones and countries, its exponential growth provides a microcosm in which we can see these entrepreneurial dynamics playing out. Not so long ago, if you wanted to conference online you had to invest in a hugely expensive hardware environment, leading to an arena largely dominated by Cisco and Oracle with their Webex and GoToMeeting products. They “owned” the market. Then Microsoft entered the market by acquiring Skype—and once again, a new market ripe for innovation was dominated by the big monoliths. While dominant they were able to dictate pricing and were under little pressure to innovate.

But the pace of technological change means it is becoming more and more difficult for anyone to dominate for too long.  In the past 18 months, we have seen the rise of a number of great new tools that outperform the legacy systems and are priced in innovative ways, making them irresistible. These tools spring up quickly, and thanks to the power of social media and the network effect they accumulate millions of users almost as soon as we’re aware of them. These are the new upstarts. I am sure they will try and keep these users for as long as they can, but ultimately a newer, faster product will come along and usurp their place in the market: and so the circle continues. Let’s hope the intricate dance between innovators, consumers, regulators and other interests that keeps markets healthy will maintain its balance.

As published on AccountingWeb - January 2020