Modern Monopolies a Review

This is a book review of Modern Monopolies by Alex Moazed and Nicholas L Johnson. The book was [purchased from the Amazon Kindle online store, and was read on the Kindle as an E-Book.

TL;DR: Modern Monopolies analyses “Platform” technology companies, such as Amazon, Uber, and Google. The book succeeds in the limited scope in which it sets itself; providing a cursory introduction into the workings of e-”Platform” companies, and the differences between types of e-”Platform” companies. Where the book treads too lightly, and in my view the more interesting areas, are the questions of competition and monopoly, the future of Super Multi-”Platform” ecosystems, and the often immoral methods used by “Platform” companies to grow.

Where to Look Next for Other Points of View:

· Tom Slee — Author of “What’s Yours is Mine” (http://tomslee.net/) — Has been a critic of the “Sharing Economy” in particular Air BnB and Uber. I have only read a small amount of his work, but appears to be respected in this area.

· Cal Newport — Author of “Deep Work” (Ezra Klien blog) — In this podcast he touches on the way e companies, (and mostly “Platform” companies), use addiction to increase the usage of their products. He touches on the view that Facebook and Twitter act as values extractors, with people not improving their communities due to the time they spend on social media.

Modern Monopolies is a book not about technology companies in general, but a specific and highly influential subset of technology companies; the “Platform”. The “Platform”, as defined by Modern Monopolies, is valuable not due to the product it sells, but in creating a network of consumers and providers. Examples given are YouTube (video makers = providers; video watchers = consumers), Amazon (sellers = providers; purchasers = consumers), and Uber (drivers = providers; passengers = consumers). In each case the “Platform” serves to reduce difficulty in linking these two groups, in reducing transaction costs of purchasing. The “Platform” then creates financial gains by taking a cut from transactions, or by monetising the aggregate data from transactions.

This value product of linking providers and consumers is unique to “Platform” companies, and is contrasted with the “Linear” company. A “Linear” company creates a product of value to consumers, and sells it for more that it cost to create; with profit created from the difference of production and sale. A key point highlighted in Modern Monopolies is that traditional software companies are usually “Linear”. Many software companies provide a software package, e.g. an ERP system such as SAP, Microsoft Office, Minitab statistical software. The problem with this is that software becomes commoditised quickly, people can copy features relatively with little capital required, driving down margins. The spectre of an open source competitor is a continuous threat, as their cost of production is effectively 0. The benefit of a “Platform” is the value is not in its software primarily, but in the network of providers and consumers on the “Platform”. The network is described as “the widest moat in the software world”, as the barrier of creating a network is much higher than creating software.

The power of networks, and their value, is reinforced throughout the book. Comparing large tech “Unicorns”[1] “Platform”s” appear to be twice as valuable as their “Linear” counterparts. “Platform” Unicorn valuations, venture capital investment, and revenue multipliers[2] are double the “Linear” companies. This is because they deliver the “faster growth, better return on capital, and larger profit margins”. The book goes into two intertwined reasons why “Platforms” are more valuable. The first are network effects. In a “Linear” business adding more customers to a provider doesn’t enhance a new customer experience. In a “Platform”, each additional customer enhances the customers experience. Take Wikipedia, a new page editor editing pages makes Wikipedia more valuable to its users, enticing more people to join the network. With Uber more customers attract more drivers, which makes the process of booking a cab easier and quicker. Coupled with these network effects is the concept of Zero Marginal Cost. That as the network grows the cost of new consumers and providers is basically $0. One more driver on Uber costs almost nothing to add to the network, one more house on AirBnB costs nothing to add to the listings. These two effects, network effects and Zero marginal cost, mean that once the network starts to grow it is a snowball effect, the more people they add the more useful they become, and the easier it is to add the increasing number of users who wish to join the network. The question now becomes how do you grow the network, as the network has little value in the beginning.

This problem is delved into by the book, and the problem is encapsulated in the phrase “growing a network is often a much more difficult problem to solve than the “Linear” approach”. The two linked problems that constrain “Platforms” are the chicken and egg problem, how do you get people on the “Platform” initially, and the relatively poor initial financial figures of “Platforms” e.g. Amazon, Uber, Air BnB, Facebook, Google, Snapchat, Twitter. This is one of the most interesting parts of the book as it highlights the difficulties “Platforms” face, not only in growing but in growing the right way. The big challenge for all “Platforms” is generating liquidity within their market places. Air BnB and Uber are highlighted as having done, and continuing to do “immoral” things to grow their liquidity, mostly based around attacking or leaching off their competitors. This can be contrasted with actions such as paying suppliers to enter your market (Uber drivers), holding events to celebrate review writers (Yell). The quality of this growth is also brought up in a comparison for Friendster, Myspace and Facebook. Freindster and Myspace grew quickly, but didn’t set rules down about the quality of their networks. Soon pornography, fake users etcera multiplied on their networks, reducing the value to participants. Facebook on the other hand was far more careful about how it grew its network. It focused on colleges, and focused on ensuring people were real. This gave strong network effects to new entrants and gave value to everyone joining. This balance of growing your network, while ensuring the growth adds values to users, is a huge challenge that scuppers many a “Platform”.

Once a high-quality network has been grown the question become how does one maintain the network. Modern Monopolies describes this task as more similar to a government role, than a traditional private company. A “Platform” must work off incentives and policies more, compared to the command and control structures within “Linear” companies. This is because a “Platform” does not own its product, the “Platforms” users exercise significant control over the product flow. The “Platform” has four key roles, 1) Audience building (mentioned before), 2) matchmaking — Matching the right consumers with the right producers e.g. amazon sellers to purchasers, 3) Core tools and services — e.g. Uber gps guidance, Air Bnb insurance. 4) Rules and Standards — E.g. On Facebook you are not usually allowed fake profiles.

Another interesting point is the different types of “Platform” companies that exist, with two different distinctions highlighted. The first is Maker vs Exchange “Platforms”. A Maker “Platform” is a one to many “Platform” e.g. Youtube, Medium, Twitch; while an Exchange “Platform” is a one: one or one : small number e.g. Uber, Amazon, Skype. The key difference is that a Maker “Platform” has a limited inventory of product, and while the Exchange has essentially infinite inventory.

This distinction is further delineated by the concept of commoditisation. In “Platform” speak commoditisation refers to the number of factors participants care about. Highly commoditised services should focus on lowering the transaction cost as low as possible, while non-commoditised “Platforms”, although lowering transaction costs, should focus on providing the participants with relevant and tailored information to base their decisions on. Uber has a highly commoditised service, a car and driver are generally unimportant as long as base requirements are met; while Air BnB is a non-commoditised service, as there is a great deal of difference between different housing options. An interesting case of “Platforms” that exist along this continuum are shopping marketplaces. Amazon has products that are highly commoditised e.g. washing up liquid, dish scrubbers, toilet paper vs standard products. If they can reduce transaction costs, such as via subscription services, that would be a distinctive advantage.

Up to now the book has come across as a useful introduction to “Platforms”. It has delved into the value provided by these companies, and has given the reader the tools to analyse the differences between them. The book goes into more detail than I have alluded to, particularly on mistakes made by companies and ideas on value chains. However, this also highlights the books weakness. At its heart the book is for business people looking to build a “Platform”. It is little concerned with the potential downsides, and brushes over them when it does discuss them. The big two I want to highlight are competition and immoral business practices.

Taking immoral business practices first, however the two are linked. This is a popular topic of discussion now with Uber seemingly trying to ruin its reputation on a weekly basis. The book details Uber’s work to destroy Lyft by booking trips and then cancelling them on mass; and “SLOGG’ers”, Ubers not so secret army of people who go to Lyft drivers and tempt them to Uber. It also mentions Air BnB’s brushes with immorality by tricking Craigslist into acting as an unwitting advertiser for its product on Craigslist listings. The reason for these actions is not solely due to personal immorality, but can be explained by the monopolistic nature of “Platforms”.

The book does not shy away from discussing the topic. It makes it clear “Platforms” must necessarily become monopolies, as competing in a single market is inefficient for the consumers; and is therefore unlikely to exist for very long. This can be thought of as imagining what would happen if there were two Facebooks. You would have to update two timelines, post updates to the same audiences twice etctera. It would be additional cost for no extra benefit. For this reason in a single marketplace it is normal for a single “Platform” to dominate.

To make this worrying state of affairs more palatable the book provides three arguments that “Platform” monopolies are not as dangerous as the ones we read about in our economics horror stories. 1) Threats can come from any industry nowadays. E.g. Amazon attacking Netflix with Amazon Video. This ensures that no one company will exist for very long; 2) Monopolies are only their because customers want them, much unlike traditional monopolies. The value comes “not from what they own but the value that they create”. We can leave them as soon as they stop providing us with sufficient value; 3) The pace of technological change forcing all companies to innovate or be left behind, coupled with these two previous factors, means that no monopoly will remain for long. This can be seen in the way Microsoft has been displaced from its all powerful position.

I believe these arguments are potentially short-sighted for the following reasons. (You will notice a lot of use of the word may in the list. More thinking on my part is required to narrow down if these concerns are truly valid);

1) Tech markets in future may require more capital, both human and financial, than previous ventures.

The technology companies of the past can set up with nothing more than a garage and a laptop; the costs of entry are low. The technology opportunities of the future that are talked about most look expensive i.e. — Medical implants and B2B services, or seem to require large volumes of pre-existing data to be successful e.g. AI and deep learning algorithms. This gives incumbents with large datasets and access to capital insurmountable moats for start-ups to cross. This will lead to more multi-platform business, as seen in China, that could become too big to fail.

If this was true you would hypothesize that in the coming decades the rate of formation of new “Platform” Unicorns will slow, and that many new Unicorn companies will either be internal to existing Platforms or heavily linked to them (e.g. SpaceEx linked to Elon Musk as he has easier access to capital. It is not a “Platform” but offers a general example).

Now obvious counter examples of new “Platforms” appearing external to the existing set of companies are Air BnB, Uber, and SnapChat. At this stage I remain unsure if this point is correct, but it would be useful to analyse the rate of formation of new “Platforms” unlinked to existing ones.

2) The impact on other sectors due to increasing monopolisation of future industries and concentration of wealth. E.g. media, social, and government.

It is not a radical statement that inequality in power structures can be a bad thing. If one set of organisations/people have disproportionate access to capital and future technology, it can lead to them unequally influencing society to their benefit.

In the situation of modern tech “Platforms” a good example of this is the rise of online advertising reducing the ability of media companies to invest in on the ground investigative journalism. Journalism for all its flaws is a good thing, and professional journalists are vitally important in our societies. Google and Facebook’s domination of advertising not only starves the supply of journalists, but also dangerously concentrates funding for media. This makes it harder to hold power centres accountable, a dangerous situation in a world where the power centres could become smaller and relatively more powerful.

If these two concerns, “Platforms” becoming more concentrated and increasing impact on other sectors, is true the question becomes what should we do to mitigate these impacts. Honestly, I do not have many good ideas but a few that came to mind were;

- The classic way is to enforce anti trust and competition law more rigorously, or introduce new laws. However if the “Platform” market naturally trends towards monopoly it would require very significant new laws to limit this trend. This could make the marketplace less efficient, a dangerous idea in a world where growth is a high priority.

- Allow consumers and producers to transition between monopolies more easily. E.g. Uber ratings to Lyft, Facebook to alternative sites. This is discussed in the book as a possibility, and although not completely disregarded is not seen as particularly useful.

In conclusion, the book is well worth a read, however it should be seen inside its limited scope. It is only trying to describe the general workings of a “Platform”, not the impact of having the “Platform” proliferate.

[1] Unicorn — A start-up company with a valuation >$1bn, usually associated with technology companies.

[2] Revenue multipliers = market capital valuation/current revenue.