In technology industries, often the incumbent
seeks to see off the challenges through an attempted blockage of technological
progress. The radio industry led the top down development of television
industry as visual extension of radio rather than an alternate medium thus
hindering its progress for more than half a century. FM radio was literally
crushed before it re-emerged in different context at a very different point of
time. The crime of FM radio was given its inherent advantage over AM radio, it
would have cannibalized the later. The AM radio industry had made significant
legacy investment which would have gone begging. To protect their legacy
investment against a raging Schumpeter they killed the FM industry or almost
so. The history of such technological
battles for supremacy is replete with instances.
In 1876, Western Union, ‘misused’ its monopoly
in telegraphy, to ensure its candidate Rutherford Hayes get elected as
President of United States of America. In fact, one can term as first instance
of misuse of today what is termed as net neutrality. To advocates of non-neutrality
of net, this must be an eye-opener. It initially ignored the telephone
industry. Yet it began to have second thoughts and reversed course. Telephone
industry in its infancy revolved around two competing prototypes one developed
by Alexander Graham Bell and another by Thomas Alva Edison. Using the Edison prototypes,
Western Union waged an all-out battle against Alexander Graham Bell and his
team. TO Western Union, telephone was
not an independent invention but a supplement to telegraphy. They believed
telephone would be short distance communication while they might maintain the
monopoly on long distance telegraphy. Therefore, their endeavors centered on
supplementing telephones to telegraph rather than cannibalizing the former. As noted above, the same process ages later was
adopted to counteract television. Coming back to Bell- Edison battles, it was
to borrow from Taleb, black swan event of attempted hostile takeover of Western
Union that made it abandon the plans. Faced with existential threat through a
hostile acquisition, Western Union gave up its rights on telephone to Bell with
the guarantee that the latter would not challenge its monopoly in the telegraph
industry.
In the late 1890s and early 1900s, US telecom
industry, Bell Telephony (later AT&T), emerged dominant. However in the
countryside, many ‘independents’ mainly local farmers and entrepreneurs used
the telephone technology to cater to the vast under-populated countryside. So
Bell having achieved victory over a Goliath like Western Union had to contend
with these ‘independents’ who might be termed the forerunners of the
contemporary social media. In the contemporary
era, high access fees for spectrum allocation, distribution infrastructure,
land acquisition, might seem high barriers of entry in telecom industry. Yet,
to these ‘independents’ set up their easy and cost effective facilities by running
simple galvanized wires over poles erected on the fences of the farm thus
developing rudimentary forms of telecom network (not unlike the development of
India’s cable television network). Their varied usage as tool of mass entertainment
also laid the foundations for the radio industry. Around this time, AT&T
was facing anti-trust pressures. Those were the days were the US government was
going big on trust busting. AT&T’s Theodore Vail responded by submitting
AT&T to government oversight, telecom network being treated as common
carrier, allowing interconnection between the ‘independent’ networks and Bell
telecom infrastructure. The Kingsbury Commitment created numerous localized ‘benevolent monopolies’
in telecom industry. In other words, telecom service providers allowed
themselves to government oversight, would charge relatively lower prices with
the trade –off being able to get a localized monopoly. Prima facie, it appeared
great victory for consumer welfare yet, in the mid the long run, a
retrospective impact on industry innovation was perhaps substantial. Incumbency
success implied downward spiral in innovation.
Radio industry, rather than software and content
driven was embedded on the foundation of hardware. Sale of radio sets
determined the revenues for radio stations. RCA owned the radio patents thus
facilitating it setting up NBC. Within a short time, the revenue models saw a
shift from emphasizing sale of radio sets to advertisements. In a series of
legal battles, David Sarnoff (Sarnoff) of RCA unseated AT&T to emerge as
undisputed king of the Amplitude Modulated (AM) radio industry. The Schumpeterian
disruption however emerged internally. FM was sought to be developed by Sarnoff
and team to iron out inefficiencies in AM. When Frequency Modulated (FM) radio endangered
AM driven network, Sarnoff opening multiple fronts ensured FM remain confined
to the periphery. A byproduct besides
the demise of numerous ‘independents’ was the tragic suicide of Edwin Armstrong,
the founder of FM Radio.
Sarnoff fashioned radio industry into a
vertically integrated eco-system with RCA monopolizing radio sets NBC-CBS duo
controlling radio station network. Later, with radio becoming susceptible to
television, Sarnoff lobbied successfully with the regulators to ban what he
termed as ‘untested’ and ‘unproven’ television technology till such time it was
proved reliable. Ironically, in the sanctuary of free market economy, the
government was entrusted to decide when a product or technology might be ready
for sale. Furthermore, regulatory capture, deep financial resources, denial of
financial investment to independent developers, all aided Sarnoff to shape a
‘neutered’ television industry without unsettling the nucleus of the radio network.
Only decades later, was Ted Turner able to overwhelm the terrestrial television
model with the launch of CNN. The cable television network incidentally created
its own version of status quo and the current American lock-in of television
channels ironically lie in the roots of earlier triumph over the status quo.
One can note a pattern in the modus operandi of
the instances cited above. Each industry in its infancy creates fragmentation
with numerous players. However, the intrinsic characteristics of the industry lead
to a shakeout thus leaving the field for a few to dominate the business
topography. In industries entrenched with network externalities, this might be
a natural path to monopoly. The industry consolidation often has state support.
Geopolitics and geo-economics too determine the legislative embedded state
sanction for industry consolidation and emergence of oligopoly and monopoly. These executive actions which facilitate and
sustain monopolies face the forces of the market over a long period of time. There
are new Schumpeterian disruptors on the wings waiting to arise. Once born,
these disruptors end up imperiling the status quo leading to long wars of
attrition. The wars of attrition might not end up in certain pattern of
victory. There are times when Goliath wins with active state connivance.
However, when there is a triumph of David however pyrrhic it might turn out to
be, there is drastic shakeout of the industry super and sub structures. Yet in course of time David becomes the new
Goliath repeating the same cycle. Constant victories by David assure
Schumpeterian growth, Goliathian victories a long age of incremental innovation
just sufficient to sustain their dominance. Contemporary big tech battles therefore
did not originate in a vacuum but constitute an element of a continuum.
Comments
Post a Comment