In a few recent
posts the increasing power of Big Tech and the possible consequences of the
same were discussed. There is an increasing tendency of over reach by the Big
Tech and thus has potential impact on the socio-economic-politic equilibrium of
the society or the country. Their over reach was manifested in the US elections
of late and has been in some ways manifesting itself in the Indian context too.
It would not erroneous to assume Big
Tech is growing too big for their shoes and the states need to curb them. The roots
of this power perhaps can be traced to early 2000s when Bill Clinton
administration compromised with Microsoft in the anti-trust suits thus ensuring
Microsoft was not split. Given the more than generous help given by the Big Tech
in their campaign, President Biden is unlikely to go hard on them. In fact,
this might embolden them to scale in their experiments in different countries.
However a question at this stage would be what gives them the power to dictate
things. Unlike in product industry, there do not exist multiple clones of
Facebook or YouTube or Twitter or at least on the scale that would threaten
these firms. In fact, Amazon too is exhibiting tremendous power and does not
have a global competitor. While regional competitors exist, at global scale,
Big Tech seems to be unassailable. To decode these reasons, as usual, one needs
to take refuge in the concept of economics.
Let us take an
example of a simple telephone. Assume one is the sole person in possession of a
telephone across the world. There might be a certain pride in owning the phone,
there might be an occasion to demonstrate it to friends and relatives but in
terms of utility it would be zero. It would no occupy no further importance
than any piece of decorative or exhibit or a painting at home. Telephones
command zero utility unless somebody else has a phone too. It would obviously
have zero practicality if you cannot speak to somebody else on that phone. Therefore
as more and more of friends and relatives begin to own and use phones, its
utility increases. Rather than law of diminishing marginal utility being applied
in the single context, the marginal utility shows an increase with every additional
user of the telephone in your network. The more and more the number of users
the more and more the use of the telephone to connect to them and thus the
increasing utility. In fact, the lack of popularity of fax machines or radio
pagers can be attributed to the non-usage in large numbers of the said
instruments. In economics this phenomenon is called network externalities or
network effects. There is a benefit to the user as more and more users join the
network though he or she will not pay any cost for the same, thus generating
externalities on account of the expanding networks.
Network effects
work in a number of industries. The dominance of Microsoft in the computer
operating system industry was essentially this. When they licensed their OS
MS-DOS to IBM years ago, it helped them retain the ownership thus facilitating
possible use in other personal computers. This was exactly what happened. As more
users got familiar with DOS and later Windows, every computer manufacturer
would prefer to load these operating systems thus leaving competitors like
McIntosh among others way behind. The same holds good for Microsoft extending
its dominance to MS-Word or MS-Excel. As more and more users are comfortable
with the same, these packages became popular thus commanding significant market
share. If someone is familiar with MS-Excel and has the same in her system, she
was unlikely to opt for other file formats. Anyone preferring to send her the
sheets would send in Excel format itself. As more users are familiar with Excel
it becomes the preferred file format. The same holds good for Powerpoint etc.
the result being most presentations are in PowerPoint.
The similar
strategy helped Intel and AMD convert the computer chip industry into a near
perfect duopoly. As one ventures into the domain of the social media and
associated public sphere, the same network effects come into prominence. The more
and more one uses the networks, they would turn more valuable. Analogous to the
telephone, being the only user of Facebook has hardly any utility. As more and
more people join Facebook, it begins to achieve a critical mass thus increasing
its utility and reach. The same holds good for YouTube where more and more
videos are uploaded, more and more users watch it, it becomes the default
platform for video upload and video watching. Similarly, the process works on LinkedIn
too. Yet, it is one part of the story. As one ventures onto these platforms,
they get locked in since it is costly to migrate to new platforms. Since every
Tom Dick and Harry in the network are present in the social media platform,
there is little incentive to migrate to another platform and begin life all
over again. Secondly the low user base in other platforms will make them less
attractive to others since their own reach will be limited. Thus the network
effects lead to higher concentration of platforms thus paving the way for a
prospective monopoly.
Since large
number of users are present, naturally any communication would have a
multiplier effect. The multiplier effect could work in both ways through
amplification of a positive or negative story. This also gives the platforms
considerable control on what chooses to pass on their platforms. The platforms
know that user migration would be difficult given the lock-in effects coupled
with network effects and thus a possible source of over reach begins. The network
effects give them the power. Yet the conventional approach of splitting firms
to break the monopoly as manifested in Baby Bells or breaking Standard Oil
might not work here. Facebook split by geography or horizontals might not necessarily
work given the network effects. Hence a different approach might have to be
adopted. The rise in platform based economy thriving on network effects at the
global scale do pose challenges to orthodox economics literature on market
power and the solutions to these problems or new externalities that emerge from
here definitely need a lot of thought provoking work to happen.
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