History has a way of dealing with monopolies
Today we are hearing endless concerns from both lawmakers and economists about the monopolies that several technology companies have created for themselves. And these concerns are growing in number and becoming more intense with each passing day.
The focal point of this outcry is companies like Amazon, Facebook, Google, Apple, and Microsoft. Economic data from 2019 reveals that these firms are the top five companies in the United States. Perhaps the most shocking fact is that just 25 years ago, none of these five companies were even in existence.
Their growth has been frightening, and many see them as a threat to both consumers and competitors. Several economists and policymakers feel that new forward-thinking antitrust laws are urgently needed.
Advice from an economist
Many years ago, the famous economist Joseph Schumpeter warned us about panicking over the current monopolies of the day. He stressed that the most effective long-term competitive pressure will always come from new products and services that provide quality improvements to consumers.
Any antitrust policy that attempts to second-guess the future, based on the present, will undermine this new potential competition, and consumers will suffer the most.
When we look over the past century, several large businesses operated in trending industries, like the tech firms of today, who were also considered to be monopolies. Yet their fortunes did not turn out as one might expect. Just as Schumpeter theorized, each of them fell hard when new innovative products and services hit the marketplace. A few were helped along by policymakers.
Here are five powerful monopolies from the past who saw their market share disintegrate.
In early 2007, an article from TechNewsWorld stated that Myspace wasn’t merely a monopoly; it was a natural monopoly. Another article from the Guardian asks, “Will Myspace ever lose its monopoly?”
Most of us during those times would’ve likely agreed with these two articles. Myspace was the first to demonstrate the awesome networking power of social media. And it blew everyone away.
Myspace was founded in 2003 and enjoyed a massive expansion of users. This new website was a social network that contained personal profiles that allowed its users to create their own networks of friends and the ability to connect to music.
After this amazing growth, NewsCorp bought Myspace for $580 million in 2005. Shortly after the transaction, a $900 million advertising contract was made with Google. Within only 15 months, Myspace’s revenue went from $1 million per month to $50 million monthly.
In 2008, it was estimated that MySpace was getting over 70% of all traffic on social media sites. At its peak in December 2008, they got over 75 million unique visitors from the United States alone — which was about 25% of the nation’s entire population.
As might be imagined, they faced several claims and lawsuits about how they created a monopoly to exclude competitors. As with the tech giants of today, they were accused of refusing to deal with other firms.
Yet a new competitor was lurking in the background. During the year 2008, Facebook had overtaken Myspace in total worldwide users. And by May 2009, Facebook had more US visitors as well. Suddenly, Myspace had lost 30% of its market share by the end of 2009.
Facebook came to the market with a more user-friendly experience that allowed non-techies to participate. It was also less cluttered by ads and encourage more interaction by its users. Facebook supercharged its user base when they adopted an email address importer tool. This allowed them to accelerate their networking effects.
After this, MySpace never really recovered. Ironically, the very same networking effects that created their massive growth is what eventually led to their demise.
The Great Atlantic and Pacific Tea Company (A&P)
A&P was first established in the 1800s and grew rapidly after brothers John and George Hartford opened their first economy store. Previously, food was purchased from small independent shops that were low-volume and high-cost. The Hartford brothers focused instead on creating a high-volume, low-cost retail model.
During the 1920’s and 1930s, A&P enjoyed extraordinary growth. By 1929, it is estimated that A&P owned 16,000 grocery stores, 100 warehouses, and 70 factories. They became the nation’s largest butter purchaser, the largest importer of coffee, and the second-largest baker.
A&P became so massive that it owned more stores than the next four food-chain competitors combined. It went from having around 4% of the market in 1919 to have over 25% of the market in 1935.
Before long, critics began attacking A&P and denouncing the effects that chain-stores had on traditional grocers. They railed against the market power that A&P had amassed. To them, A&P was the Amazon of their day. It was believed that they had an unfair advantage because of all the data collected from stores throughout the country.
By 1936, a powerful lobby had been formed to protect traditional retailers and wholesalers. Policies were enacted, state and local taxes were imposed, and price control laws were levied against chain stores. The Robinson-Patman Act was passed to prohibit wholesalers from offering different prices to different buyers except for ill-defined circumstances. This restricted the consumer-friendly deals that A&P was able to get, so consumers ended up paying more for products.
From this point forward, the profitability of A&P began to wane. Ironically, before the Robinson-Patman Act was even passed, A&P and other chain food stores had already been struggling with stiff competition from big-box supermarkets who had refined the same marketing model.
Kodak was the exclusive representative of the personal photography industry for many decades. They were the first to put cameras and pictures into everyday homes.
Additionally, they handled the entire process from marketing and developing cameras, film, photo development supplies, and printing.
How about this monopoly? By the year 1976, Kodak was estimated to command 90% of the US film market and 85% of the camera market. The company sold cameras at low prices so that they could later supply high revenue products like film and services like photo developing to those camera owners.
Their monopoly over the film industry was especially long-lived. They were getting complaints from the Federal Trade Commission as far back as 1923. An article in Time magazine stated that “the company had manufactured and sold, up to March 1920, 94 percent of all film worldwide, and sold 96 percent of all film, produced in the United States.”
Kodak was often described as a monopoly throughout its existence. To get some perspective, Kodak’s domestic standing in the photography industry was once more dominant than Apple’s standing in the mobile vendor market today.
However, this began to change when the Japanese Company, Fujifilm, started going directly against Kodak in the 1980s and 1990s. Fuji gained considerable ground when big-box retail stores started replacing film and photography stores.
These powerful new retailers wanted to offer customers a bigger range of products, and Fuji obliged them. By the late 1990s, Fuji was eating into Kodak’s market share.
However, it was a completely new kind of product that eventually sunk Kodak. And that was the consumer digital camera. This new camera was revolutionary. Consumers no longer needed to buy film or pay to get pictures developed — instead, they could now review, edit, and upload photos to their computers. On top of this, digital photography was both instantaneous and much easier to store.
Kodak was never able to find their place in this new digital marketplace, even though one of their engineers had invented the first digital camera in 1975. Sadly, Kodak was forced to file bankruptcy in 2012.
Xerox created the very first modern photocopier in the year 1960. Naturally, they went on to dominate that sector. By 1970, they had almost 100% of the photocopier market.
The company became so dominant that the act of photocopying was commonly referred to as ‘xeroxing.’
In 1973, an antitrust lawsuit was filed against Xerox by a competitor that alleged Xerox had violated the Sherman and Clayton Acts.
This led to a five-year legal struggle and cost the company several million dollars. But when the final settlement was reached, there were several new competitors like IBM, Kodak, Ricoh, Canon, and Minolta waiting. Xerox’s patents had expired, and these new rivals had developed smaller and cheaper copiers.
By the year 1976, Xerox’s had only a 59% market share, and it kept falling. As digital copiers, computers, and home printers became available to consumers, they lost even more market share.
Once upon a time, Yahoo! actually dominated the search engine market. Nowadays, many people — especially young people — think that Google invented the internet search. Believe it or not, Google was the 35th search engine to enter this market.
From 1997 through 2000, Yahoo! was hands down the most popular search engine. In August 1997, it commanded around 34% of all unique search engine users. In the year 1998, there was even a Fortune Magazine article that was entitled “How Yahoo! Won The Search Wars.”
But by the year 2000, everyone in the industry could see that Google would eventually surpass Yahoo! because it had better technology. Later that year, there was an agreement reached that Yahoo! would use Google’s search results.
Today, Google commands an estimated 92% of the search engine market world. Bing has 3%, and Yahoo! has only 2%.