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Sergey Brin, Mark Zuckerberg, Jeff Bezos (Credit: Reuters/Carlo Allegri/Beck Diefenbach/AP/Matt Sayles/McIek via Shutterstock/Salon)

Amazon, Facebook and Google have the same secret

Did Bill Gates intend, when he set out, to exploit the extraordinary economies of scale in software—which, unlike perhaps any other type of business, occur on both the supply and demand sides? It seems likely. In the 1970s, his corporate motto was “We set the standard,” and at the beginning of the 1980s, he forecast that a “natural monopoly” was possible. It appears that Gates at least intuitively understood this principle of software economics before anyone else.

 Did he also know that by basing his monopoly on intellectual property rights he would render it all but immune to effective anti-trust remedies? This seems less likely. After all, having a monopoly is the secret ambition of every right-thinking businessperson. Probably Gates, in his eagerness, simply did not consider that, a decade later, governments would act against him. Indeed, when they did, Gates was outraged because he believed that the antitrust laws were designed to protect consumers and that he was giving consumers better products at no additional cost. If Gates had anticipated the governments’ attack, surely he would not have used the words “natural monopoly” in a public forum.

Still, Gates’s exploitation of economies of scale was without a doubt a stroke of wealth secret genius. It would not take a genius to copy Microsoft, of course. But then, because of intellectual property laws, no one can copy Microsoft; that is the whole point. Still, a very smart person could probably emulate Bill Gates, applying his approach in another market. And in Silicon Valley, very smart people are not in short supply. Among the wealthiest individuals in the world, platform strategies—usually based on intellectual property rights protections—are well represented. Nearly all of the dot-com billionaires in the top fifty spots have gained limited monopolies or appear likely to gain such monopolies in the future, and investors are backing them generously in the hope that they do so. Most of their companies (Apple, Oracle, Google, Facebook, Amazon) have been accused of antitrust violations. But even when the antitrust cases have gone against them, the basis of these monopolies in intellectual property has limited the effectiveness of remedies. Many have been forced to pay fines or disclose key technical details to competitors, but none in a way that would enable direct replication of their core products or services.

First among the companies that rule the dot-com roost is still Microsoft, which produced not only the $76 billion fortune of Bill Gates and the $19 billion fortune of Steve Ballmer but also (narrowly outside the top fifty) the $16 billion fortune of Paul Allen—about $111 billion in personal wealth in total. Google comes next, exploiting the network effects inherent in search and developing the web’s premier advertising platform (producing the $32 billion fortunes of Larry Page and Sergey Brin in the process). Google is followed by Oracle, whose founder, Larry Ellison, has a fortune of $48 billion. Oracle’s platform is in business software and hardware (where Microsoft is uncharacteristically an underdog, although gaining rapidly even as it cedes share to Apple on the consumer side). Mark Zuckerberg’s Facebook follows, with perhaps the most straightforward network-effects strategy (the more people who join Facebook, the more valuable the site is as a place to connect—and to advertise within). But simple strategies can be good, and his fortune is now estimated at $29 billion.

Of course, there are many other such strategies used by famous names in the technology sector. In the 1990s eBay boomed with a network-effects business model that increased in value the more buyers and sellers it attracted (and despite recent difficulties, the site continues to monopolize the online auction space). Twitter’s social messaging network was one of the leaders of the second wave of Internet companies, and more recently the messaging network WhatsApp famously landed itself a $19 billion valuation in only five years (by virtue of its 450 million users, which acquirer Facebook evidently judged to be an insurmountable “network effects” lead in online instant messaging).

Amazon, the famous name in high technology I have omitted until now (founder Jeff Bezos’s fortune is $32 billion), initially struggled to attain profitability. It was a retail operation, so there were no network effects to speak of, and while its virtual storefront meant its costs were lower than those of many retail competitors, the company did not benefit from the snowballing economies of scale of companies like eBay. However, user ratings (now ubiquitous on websites) did provide a platform for buyers to create value.

And by 2005, after many twists and turns, the company was widely recognized as a leading exponent of platform strategies. For instance, Amazon enables third-party sellers to reach buyers on its website and third-party marketers to be compensated for advertising products sold on Amazon. Moreover, in recent years, the supply-side economies of scale inherent in retail (essentially, the ability to use one’s size to squeeze the profits out of suppliers, as with Circuit City) have also begun to kick in, enabling Amazon to both undercut its competitors and (occasionally) turn a profit.

Amid these rising fortunes, the debate on what to do about these modern monopolies created by intellectual property law continues to rage. One approach, of course, is to drastically reform intellectual property law—perhaps going so far as eliminating patents, as Boldrin and Levine have advocated. Alternately, one could update antitrust remedies so that there was some way to break up intellectual-property-based monopolies (as they broke up Pierpont Morgan’s Northern Securities Railroad and Rockefeller’s Standard Oil). Timothy Wu, a professor of law at Columbia University, advocates a “separations principle,” which would split companies into content creators, distributors, and hardware makers. And yet, because such approaches would presumably at a stroke destroy much of the stock market value of the U.S. and global high-technology sector, they seem profoundly unlikely to be implemented. Indeed, the likelihood diminishes as the value of intellectual-property-based companies continues to grow.

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