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Lack of High-Tech Competition Highlights Need for Action by Regulators

The combination of incumbent control of unique data, the willingness of the behemoths to run at a loss in multiple related sectors in order to reinforce power in their core profit-making “castles,” and their increasing willingness to buy out any potential rival long before they become a viable competitor have all contributed to the broad decline in competitiveness and entrepreneurship in high-tech markets. 

The competition in phones and tablets is increasingly the exception and related to the fact that most of the companies competing in that sector don’t see it as a primary profit-center; in those core profit centers, companies increasingly seek and use the power of big data to gain as exclusive dominance as possible.   Where that dominance does not come organically, companies can just acquire any startup likely to infringe on that market power.  For example, Facebook extended its social media presence first by its billion-dollar purchase of photosharing company Instagram and, more recently, its $19 billion takeover of WhatsApp, one of the largest global texting platforms, essentially eliminating any significant rival in the various iterations of global social networking.[i]  

Contra arguments that antitrust and other pro-competition regulation is outmoded in the new, high-tech economy, the reality is that the rise of the Internet has coincided with a drastic decline in new competitors emerging to challenge dominant firms. Reflecting the dominance in these silos, most new small companies aren't looking to go public with an initial public offering (IPO), but instead are "cashing out" by getting acquired by existing big firms like Google, Amazon or Microsoft.   Where there were an average of 311 IPOs per year during the 1980-2000 era, researchers Xiaohui Gao, Jay R. Ritter and, Zhongyan Zhu found there were only 102 IPOs per year during 2001-2009[ii]; that's a decline of two-thirds and reflects what those researchers see as an economy where minnows don't grow up to challenge the big fish but are being eaten to fatten already existing dominant, often nearly monopolistic firms.  This is reflected in this graphic courtesy of Zero Hedge about the long-term collapse of startup firms going public with IPOs:


For smaller companies looking to go public, the IPO market has been even less active.  In 1999, there were 249 IPOs that raised between $5 million and $60 million from the market.  In 2012, there were just 12.[iii]  In an economy of super profits for big data platforms and close to non-existent profits for smaller firms, it makes sense that most firms are looking to cash out through acquisition.   Snapchat may have made news by turning down a big buyout offer from Facebook to remain independent[iv], but it's news precisely because of how unusual that choice has become, despite the handful of high-profile IPOs like Facebook, Twitter and Linked In.

The reality is that few new firms are joining the ranks of top companies in the economy.   A 2010 Kaufman Foundation study found that four-fifths of the Fortune 500 came into existence before 1970, over forty years ago.    Firms created during the 1910s a century ago account for more firms in the Fortune 500 than firms created in either of the last two decades of the "Internet economy."[v] Similarly, a Brookings study by Ian Hathaway and Robert Litan found that the share of companies that are more than 15 years old has increased dramatically since the early 1990s.[vi]

Given that the market is producing fewer likely challengers in the marketplace to keep dominant data platforms in check, it becomes even more important for regulators and courts to take action earlier in technology markets, before market dominance arises.  The standard worry about antitrust (or any other government regulation) is that it will undermine innovation, yet centralized power in a sector is just as likely to undermine innovation by the leader discouraging innovation by potential entrants to a sector.   Greater regulatory intervention could actually encourage competition that better serves user privacy and consumer economic interests.

 

[ii] Xiaohui Gao, Jay R. Ritter & Zhongyan Zhu, Where Have All the IPOs Gone? (Apr. 3, 2012) (Working Paper), available at http://www.hbs.edu/units/finance/pdf/Where%20Have_April_3_2012.pdf. Similarly, the Progressive Policy Institute in a recent paper highlighted the fact that most new startups are taking the path of acquisition by a larger company over the IPO route. Michael Mandel and Diana G. Carew, Progressive Pol’y Inst., Innovation by Acquisiton: New Dynamics of High-Tech Competition 7 (2011), available at http://bit.ly/vWEtFY

[iii] “Cuban Says ‘Dead’ Small IPO Market Is Hurting Competition,” Bloomberg,

 http://www.bloomberg.com/news/2013-06-14/cuban-says-dead-small-ipo-marke...

[iv] “Why did Snapchat's 23-year-old CEO reject a $3 billion buyout offer?” Christian Science Monitor, Nov. 16, 2014;

 http://www.csmonitor.com/Innovation/Horizons/2013/1116/Why-did-Snapchat-...

[v] Dane Stangler and Paul Kedrosky, Neutralism and Entrepreneurship: The Structural Dynamics of Startups,

Young Firms, and Job Creation, Ewing Marion Kauffman Foundation, Sept. 2010, http://www.kauffman.org/~/media/kauffman_org/research reports and covers/2010/09/firmformationneutralism.pdf

[vi] Declining Business Dynamism in the United States: A Look at States and Metros, Brookings Institution, May 2014, http://www.brookings.edu/~/media/research/files/papers/2014/05/declining...