A glimpse of the countless apps and websites This mess in our online lives would indicate rich competition. In reality, online diversity is declining.
The lack of diversity in the online economy is most evident in technology itself, where power imbalances have increased over the past decade, resulting in less and less control of the internet. Google search accounts for 92% of all web searches worldwide. Its Chrome browser, which uses Google search by default, is used by nearly two-thirds of users worldwide.
Source: StatCounter Global Stats – Search Engine Market Share
Media investment analytics firm Ebiquity found that nearly half of all ad spend is now digital, with Google, Meta (formerly Facebook) and Amazon single-handedly accounting for nearly three-quarters of the world’s digital ad dollars by 2021.
Additionally, recent research examining global competition across all industries over the past decade has found that across all industries, a small number of companies (as represented by the domains they control) account for an ever-increasing share of the total online – attracts attention.
This emerging monopoly is inherently difficult to control and regulate. When a U.S. judge found a lack of evidence in the Federal Trade Commission’s antitrust case against Facebook, it became clear that regulators were struggling with the challenge of even defining what type of business platforms like Facebook it belongs to, let alone for measuring and demonstrating dominance or lack thereof in this domain.
Regulators in the largest global markets continue to look for ways to restrict platforms: the EU’s Digital Markets Act aims to target “gatekeeper” platforms, while in the US, Congress continues to debate the American Choice and Innovation Online Act , who tries to stop the biggest players from limiting competition.
A shift in competition
The economic law of diminishing returns, relied upon for centuries as a handbrake against organically emerging monopolies in new industries, no longer applies in the online context. The familiar pattern of a leading company or brand existing alongside challengers and niche brands (think Coke, Pepsi and Dr Pepper) in a market oligopoly has not migrated online.
In the last century, takeovers, mergers and implosions were common, but oligopolies, in which a few big players divided up a market, were common. In this century, the digitization of the economy has removed much of the fundamental “friction” in business and with it many of the natural barriers to monopolies.
The adoption of digital technologies across all industries has unleashed a range of new economic forces, including increasing returns, interoperability, network effects and switching costs, which collectively can be termed “online gravity”.
Online software companies see that the marginal cost of acquiring additional customers decreases, not increases, as market share increases. In the business-to-business market, companies build services into their “stack” and an entire ecosystem based on interoperability grows around them. Multi-sided marketplaces like Airbnb offer both hosts and guests greater value by tapping into a larger network. And when employees are proficient in using an enterprise software system like SAP, nobody wants to relearn a competing system and the time it takes to learn it.
These new rules of the platform economy mean that many sectors are now dominated by a very large and dominant leader and much smaller niche players.
And so there is a conundrum. Is technology a malevolent force contributing to the growth of monopolies, or is it a benign source of innovation and healthy competition? The answer is, it’s both – depending on how you look at things.
The Paradox of Diversity
With its low barriers to entry, the frictionless online world is often viewed and portrayed as intensely competitive, with a constant stream of innovation emerging from an army of basement entrepreneurs and increasingly patient investors ready to back them. And yes, that’s right. But alongside seating platforms that are becoming the biggest companies in history — many of which dominate their corners of the world.
Most platforms aren’t malevolent forces, but they do have some unintended consequences: they function like pines, dropping needles in a wide arc around their spot and preventing new shoots from sprouting in their space. And there are signs that this arc is growing around established companies around the world.
About half of the websites that started in 2005 are still around more than 15 years later. But since then, fewer and fewer sites have survived beyond their early years. Over 90% of websites launched in 2018 failed within two years.
A study published last year examining the global “survival rates” of startups over the past decade found that they have been declining over the long term. Social media links as a measure of whether a company was “live” after its first appearance found that five years later, nearly 40% of those born in 2006 were active, but just over 3% of those born in 2015 are active today.
This is partly due to the power of tech giants to acquire or bundle features from early-stage innovators into their platforms, often for free. As is well known, Microsoft made its Internet Explorer web browser the standard for all preinstalled Windows PCs worldwide and integrated web server software into its dominant operating system, which meant an early death for the web pioneer Netscape.
Many of the recent innovations in social media, driven by Snapchat (ephemeral messaging), TikTok and before that Twitter’s Vine (short videos), have since been incorporated as new features into Instagram Stories and Instagram Reels.
Regulating online platforms and the companies that operate them poses particular challenges for governments due to their size and global nature. The platforms are global, of course, but the business of government itself and the functions that go with it – promoting a level playing field for business, collecting taxes and ensuring the privacy of citizens – are rarely global. Steps are afoot on that front, with the OECD coordinating a plan for new international tax rules in 130 countries.
US Federal Trade Commission Chair Lina Khan, in her previous work as an academic, paved the way for a rethink about monopoly and the need to look beyond price and market share. In Khan’s words, “Consumers’ long-term interests include product quality, variety and innovation – factors best fostered by a robust competitive process and open markets.”
Understanding the future of competition in this new economy also requires an important distinction between structural and functional competition.
For example, Facebook claims that many of its users also use other services such as YouTube and Twitter. But just because they share users or even advertisers doesn’t necessarily mean they’re in direct competition.
Google and Facebook may compete for consumer ad revenue, but in the same way that Ferrari competes with, say, Tesla or Hyundai for a share of the broad auto pie. Many Ferrari drivers also own other cars, such as B. family sedans or SUVs made by other companies, but that does not mean that these companies compete with Ferrari in any way. They’re structurally similar (all automotive, all four-wheelers, etc.), but functionally worlds apart (off-road and family vans versus sports cars).
The strong evidence that economic structural diversity is declining over the long term is somewhat counterbalanced by analyzes showing clear, continuous growth in functional diversity.
Technology continues to support the emergence of new categories of applications (e.g., ephemeral social messaging), services (online movies), and products (electric vehicles), all undergoing a now-predictable cycle of explosive growth, competition, and dominance by a leading player Company.
While finding ways to regulate global technology platforms is important, it is perhaps just as important, if not more important, to encourage innovation through the cycle of perpetual functional diversity – to return to the analogy of platforms like pines and the growth of new ones Promote tree species in new areas.
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To date, most of the world’s largest global tech giants have emerged from the US or China. But with increasing global venture capital investment, we’re beginning to see a new wave of global tech giants from centers like London (Checkout.com), Stockholm (Klarna) and Sydney (Canva).
Despite rising trade protectionism, the online gravity economy will remain. Therefore, our best economic opportunity is to ensure that more technology-enabled ecosystems thrive in a larger number of communities around the world. The national digital infrastructure is becoming increasingly important for economic development and productivity. And governments and regulators need to get better at measuring and promoting the benefits that come from greater global economic diversity.
2015 book by Paul McCarthy online gravity explains how technology is rebooting the global economy.
This article was published in collaboration with 360info.org