Sunday, June 2, 2019

Winner take all - until..

Some of the Internet giants - also known as the "FAANG" companies based on their initials - start to be so big due to the winner-take-all effects that they may face antitrust lawsuit.

From what I understand two of the companies in particular are nearing this stage: Amazon and Google. Both are very dominant and vertically integrated (i.e. they develop most of their infrastructure by themselves). Apple is also vertically integrated, but in my view, they don't have the same kind of dominance in their respective markets than Google and Amazon do.

American Telephone & Telegraph Company (AT&T) is an interesting precedent because it was vertical integration - not it's domination in itself - that motivated Federal Communications Commission to sue AT&T. They suspected that the AT&T was using monopoly profits from its Western Electric subsidiary to subsidize the costs of its network, which was contrary to U.S. antitrust law. The case was filed by the United States Department of Justice in 1974. [source]


Vintage Telephone Equipment at Museum of Communications 
by Marcin Wichary [CC BY 2.0]

Initially, The plaintiff in the court complaint asked the court to order AT&T to divest ownership of Western Electric. AT&T didn't want to do this. Instead, they proposed to give up ownership of the local operating companies, which was what eventually took place in 1984. [source]

Over ten years later - in 1996 - AT&T divested also the equipment arm as Lucent. The end result is that no operator today has significant own development in the telecommunications equipment. There has been significant consolidation in both operator and equipment provider space (e.g. in latter space what used to be separate Alcatel, Lucent and Siemens Communications are now part of Nokia Corporation.

The same kind of development may have to take place in the Internet economy to prevent some corporations become too dominant for the market to function efficiently. Separating technology development from the "operator" function is one way. I'm not too deep into FAANG family so will not speculate on details. What is clear though is that monopoly (and near monopoly) is a bad thing in free market economy and authorities will step in when some company becomes too dominant. Winner really can't literally take all.


Disclosure: Long Nokia and Apple.