Natural Monopoly in Silicon Valley

June 14, 2012 7:44 pm Published by Mike Cotter

Like Microsoft before it, Google now sits in the hot-seat as the target of anti-trust investigations. While no legal suit has yet been filed, the tech giant stands accused of privileging its own products in search-engine results. Google accepts that it gave its own wares preference, but claims that it was only to enhance customers’ experiences, since it could generate links to them with the greatest speed.

Let’s consider the scope of Google’s reach on the internet. It has enough high-quality enterprises that it can routinely steer customers to its own products without risking consumer flight. Perhaps Google is using its market power to kill competition, as Expedia and others claim. But it is more likely that people simply enjoy having their calendar (Gcal) linked to their email (Gmail) linked to their documents (Google Docs), all on a web-browser (Google Chrome) powered by the same firm. And so long as people prefer to use Google products because of the perks of the Google system, then Google will have what economists call a ‘natural monopoly’ in those fields. A natural monopoly is an industry which can be most efficiently managed by one firm, rather than several competitive ones. If you define efficiency in terms of ability to make customers happy cheaply, then Google wins out.

Yet, one online industry—social networking—represents an area where Google’s natural monopoly ceases to hold. Google +, the company’s foray into social networking, received unparalleled hype prior to its launch, only to underwhelm and underperform in the ensuing months. It’s not that social networking isn’t a natural monopoly—in fact, quite the opposite. Rather, it just so happened that another firm already had control when Google showed up.

By the time Google + was launched in early 2011, Facebook already had over half a billion users. During the late 2000’s, while Google was still watching the development of online social networking from the sidelines, Facebook was putting the likes of Bebo, Mypace, Frendster out to pasture. Social networking is indeed a natural monopoly: consumers will inevitably get the most value out of a network with the greatest number of users, and there is no need for two. Consumers prefer to go where their friends are. What’s more, outside developers will inevitably follow the users, meaning that an established site like Facebook will have better apps and features than the competition.

If social networking is a natural monopoly, one might ask, then how do you explain the success of, say, LinkedIn? Well, let’s first put things in perspective: LinkedIn has 160 million members—well below Facebook. Second, LinkedIn is older than Facebook and has an established niche: career advancement. However, the advent of social recruitment on Facebook poses a challenge to all career sites, including LinkedIn. More broadly, Facebook’s enormity threatens any and all social networks that managed to make it to the second decade of the 21st century still breathing. Developers love Facebook, because that’s where the customers are. Corporate recruiters are beginning to love Facebook, because that’s where the candidates are. Facebook’s increasing dominance in the world of social media means that activities that used to occur elsewhere are moving to the social network. We believe in Facebook, and dedicated leveraging its enormous size to help companies find the best talent out there.

This post was written by Mike Cotter