By Vivek Wadhwa
PayPal co-founder Peter Thiel openly exposes one of tech industry’s darket secrets: it likes to build monopolies. Competition is for losers, he says, because it limits profits.
He posits capitalism and competition as opposites, on the basis that “capitalism is premised on the accumulation of capital, but under perfect competition, all profits get competed away”.
Monopoly is great for tech moguls because it helps them amass unprecedented money and power. But everyone else loses. “Profits come out of customers’ wallets, and monopolies deserve their bad reputation,” Thiel admits. The reality is that monopolies are a cancer on capitalism. In truly free markets, competition causes a constant churn and makes it difficult to be complacent in service, quality or innovation.
The tech industry is literally getting away with the murder of capitalism, and the forces that have enabled it to do so have outpaced US policy makers, who understand neither the technologies nor the underlying dynamics. This is why Facebook, in the short 15 years of its existence, has been able to dominate social media globally and to fan the flames of hatred and divide societies by spreading misinformation.
Amazon has been less sinister but is using its powers to dominate new industries and expand globally. Now it is beginning to dominate all forms of retail as well as cloud services, electronic gadgetry and small-business lending.
This is why I believe that India is doing a wise thing in limiting its monopolistic practices. It recently passed new laws for its ecommerce sector, which amongst other things, inhibit the ability of Amazon to do what it has done in the US: leverage its merchant platform to learn what products sell the best and produce an Amazon-branded version.
Platforms are another of Silicon Valley’s secret weapons. To understand how these work, think of the difference between a roadside store and a shopping centre. A mall owner creates a shared infrastructure which takes care of the day-to-day maintenance and upkeep of the facilities so that renters can focus on selling goods.
The mall has many advantages in size and scale, and every store benefits from the marketing and promotion done by others. The owner charges a rent and gains competitive intelligence. Facebook, Amazon Marketplace and Apple’s App store are all platforms. These have given them a strategic advantage and made them amongst the most valuable companies in the world.
It is usually a win-win, unless the platform owner wipes out all competition and becomes the only way for stores to reach their markets. Once that occurs, it can increase rents and disadvantage anyone who competes with it as Amazon is doing on its platform. And stopping this is the chief intent of the revamped Indian rules. “The idea”, says anti-trust lawyer Lina Khan, “is (that) you can either run the marketplace or sell your goods on the marketplace, but not both”.
Amazon has also been using its success in one industry to dominate another. It has been willing to forgo profits and use its advantages in shipping and warehouse infrastructure to kill off competition, a practice generally known as predatory pricing. As Khan wrote in ‘The Yale Law Journal’, Amazon’s practices resemble those of the all-powerful railroad barons and independent businesses that ride Amazon’s rails becoming increasingly dependent on their biggest competitor.
This is why Amazon now captures nearly half of all US ecommerce business.It “marched toward monopoly by singing the tune of contemporary antitrust”, Khan wrote.
Europe took the lead in reining in the tech industry’s anti-competitive behaviours and now countries such as India are weighing in. It is time for US policy makers to restore American capitalism by applying the same lessons.
(The writer is a Distinguished Fellow and professor at Carnegie Mellon University Engineering, Silicon Valley and a Distinguished Fellow at Harvard Law School, Labor and Worklife Program. Views expressed above are his own)
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