Are big platform monopolies stifling new product development?

November 15, 2010

Why are reports of the dominance of platform vendors greatly exaggerated?

Tim Wu, a professor at Columbia Law School, just published an article in the Wall Street Journal titled “In the Grip of the Internet Monopolists”. On first perusal, the article appears to make a lot of sense – we are increasingly dependent on a handful of very large, dominant Internet service and software providers such as Google, Microsoft, Amazon and EBay, which are essentially platform companies that control both buyers, users and third party vendors by nature of their dominance. We need to be mindful of the potential risks; however, there are enough countering forces to these monopolistic tendencies (if there ever were any in the first place) to obliterate the surfacing of any antitrust concerns just yet.

I admit the article does have its merits. When Internet companies grow to the size of Yahoo!, Google or Amazon, they have immensely powerful competitive muscles in product development, marketing and sales. Their scale allows them to invest in superior technology market trends, infrastructure, and also attract the best people, which is the key to creating competitive advantage in the technology market. Their grip on the market does have the tendency to be self-perpetuating, as the network effects require all smaller firms and competitors to play “nice” with them and be part of their ecology. We are seeing the same dynamics play out not only in the mature US market, but also in other developed or emerging markets such as Korea, China and India. In these markets, the first mover(s) in E-commerce, Internet portals and Internet content delivery usually grow dominant so quickly, it pushes other vendors out of the market because no more room exists.

Dominant players are also playing the Kronos strategy with increasing frequency – they acquire serious competitors with their enormous profits and incorporate them (but most often than not, let them die away). In fact, M&A statistics have shown that most venture backed exits in the Internet technology space are now through acquisition, with the singular exemption of Facebook, which is on its way to becoming a monopoly itself.

However, we do think this threat is not as dire as Tim Wu predicts. Firstly, we are seeing a rapidly evolving Internet content and technology landscape ripe with rivalry and extremely intense competition. There is competition between major players that are encroaching on each other’s turfs; there is competition from start ups that are reinventing the technology, and competition is also evident with game-changing innovators that are re-defining the market itself by creating completely new categories of products.

Just take Google’s supposed dominance in information retrieval – search engine in common terms. Just a few years ago, if I was looking for any information online, the first and probably last thing I would do was to enter some keywords into Google to be sure I would find what I was looking for. Now, I will also look around on other sites: Facebook, LinkedIn, especially the ever growing categories of “Q&A” sites.

Another angle by which new startups can compete with large incumbents is to carve out a market niche through much disciplined market segmentation. As big companies grow they become less nimble competing in small niches, and an upcoming vendor’s agility will be a key competitive advantage.

We will also be amiss if we discount the ever growing open-source software movement, which is leveling the playing field against incumbents in many ways by both providing cheap infrastructure and costless tools on which software companies can build as well as giving customers lower priced alternatives to proprietary software.

Lastly, but perhaps most importantly, because start ups desire to grow really big, they will not succumb to the temptation of a strategic acquisition by an incumbent. Think about what would have happened had Facebook agreed to the Yahoo acquisition for $1B back in the days.

The answer to preventing monopolistic behavior is not further antitrust regulation, as Tim Wu suggested. We would argue that the current market dynamics are helping to sustain competition. By making the innovation process even cheaper yet more effective, and maintaining the supporting ecosystems around those start ups, we can continue to build and grow large start ups that upend the status quo and naturally deter monopoly.

Chief Business Officer at UserTesting

Tien Anh joined UserTesting in 2015 after extensive financial and strategic experiences at OpenView, where he was an investor and advisor to a global portfolio of fast-growing enterprise SaaS companies. Until 2021, he led the Finance, IT, and Business Intelligence team as CFO of UserTesting. He currently leads initiatives for long term growth investments as Chief Business Officer at UserTesting.