Network Effect Favours Information Monopolies

The Wall Street Journal has an article on the reliance we have on large information technology monopolies that have grown from the network effect of the Internet. The ubiquity of the Internet allows people to easily gravitate to the biggest and best online services which create monopolies that will fight to exist long past their usefulness and competitiveness. The key issue is not necessarily that monopolies tend to get created but whether there is enough competition to keep them honest and whether they will be replaced quickly when they are no longer competitive. The outlook could be more hopeful than suggested in the article as there are examples of once large services that have been replaced relatively quickly. Two that come to mind are Myspace and Yahoo. The examples used in the article like Google, Facebook, and Twitter while having monopoly characteristics in their domains haven’t been around for that long, don’t yet have competitors that can offer a compelling alternative, and haven’t yet established long term business models in key aspects of their business. Stating that there might be a danger of them becoming too powerful or outliving their usefulness could be a bit premature at this stage of their lifecycle.

Periodic assessments of market competition are important to keep in mind, however, because there is a danger of large players abusing power. Consumers need to be aware of the potential monsters they could be creating if they join the bandwagon and thereby limit their alternatives. The best way to avoid service complacency and abuse is healthy competition. Think of every transaction whether it be attention, information, purchase or subscription as voting with your dollars.