The way we think about businesses and the economy is outdated and marred by contradiction. No where is this contradiction more clear than when it comes to monopolies.

As an entrepreneur, everyone wants to own a monopoly. Meanwhile, investors clamor to gain entry into fundraising rounds where tech startups that are on the way to monopoly status. And as billionaire investor and Paypal founder Peter Thiel says, his number one piece of advice to entrepreneurs is: if you're building a company, build a monopoly.

Yet ask a business owner if they want to be labeled a monopoly, and the answer is almost always no. Every business wants to be a monopoly, but no business wants to be called one. That's because monopolies are considered bad. Thanks to their predecessors, monopoly businesses have a reputation for evil. And in many cases, rightfully so.

20th century monopolies like AT&T, Standard Oil, and RCA took advantage of consumers and stifled competition in their industries. Competition forces companies to keep consumers' best interests in mind. However, in the absence of competition, consumers fall victim to greedy monopolists. This is all true. When a monopoly controls an industry's entire supply chain, it's easy to keep out the competition. As Timothy Wu explains in his book, Master Switch, monopolies use a mixture of government regulation and supply chain ownership to shut out any competition.

Yet modern monopolies don't work the same way as their industrial-era forebearers. Now, this isn't because the executives of today's monopolies are better people. Respectfully, not many people would say that Steve Jobs was a nice person. So what's the key difference? Today's modern monopolies are platform businesses--and they don't own their supply chains. Instead, these businesses create economic and social value by building and managing massive networks of users. Rather than directly producing or selling their own goods or services, these companies simply connect people.

Examples of platform businesses include Facebook, Google, Apple, Alibaba, Uber, and even Snapchat. Driven by network effects, these businesses are capable of growing far beyond the limits of traditional, asset-based businesses. That's why platform businesses are rapidly taking over existing industries and creating entirely new ones.

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Image from Modern Monopolies: What It Takes to Dominate the 21st Century Economy

But other than size and market dominance, today's titans of industry have little in common with the monopolies of the nineteenth and twentieth centuries. Because these platform companies don't own their supply chain, they don't have the same ability as old, industrial monopolies to shut out competitors.

For example, at one point Standard Oil owned more than 90 percent of the production of oil in the United States--nearly all of the country's oil refineries. In other words, at Standard Oil's peak, no one else could even make a competitive product, let alone sell it.

This method of establishing market dominance contrasts starkly with how modern monopolies operate. Platform businesses grow not by acquiring more factories but by connecting more and more users within their networks.

Platforms become dominant not because of what they own but rather because of the value they create by connecting their users. They don't own the means of production, as industrial monopolies did. Instead, they own the means of connection. Standard Oil, Facebook is not.

While these platform companies do have significant market power in their industries, they don't control their users in the same way that Standard Oil controlled its sources of production. Alibaba can't just flip a switch and change the output of its sellers. It controls its market, but it does so only indirectly by providing value to its merchants and consumers.

Additionally, today's platforms are competitive in a way older monopolies were not. As a result, modern monopolies can rise and fall from the iron throne much faster than the industrial monopolies of the 20th century. For modern monopolies, life is less Downtown Abbey and more Game of Thrones. There's always a new competitor ready to cross the sea and steal your users.

For new tech startup founders and investors, that's great news. They can become billionaires and create the next great modern monopoly within a few years time. Look at Instagram founder Kevin Systrom, who sold his company for a billion dollars while it employed only 11 people. And Evan Spiegel, founder of Snapchat, turned down a $3 billion offer from Facebook at the age of 23.

For users, this competition is great news too. New platforms are creating entirely new categories of economic and social activity and value. Imagine trying to connect with your college friends before Facebook, connecting with celebrities every day online before Twitter or Snapchat, or selling your old belongings online before eBay.

In developing countries, where the infrastructure of commerce is less established, the contributions of platform companies are even more pronounced. For example, at one point, Alibaba's Taobao and T-mall marketplaces accounted for as much as 80% of China's ecommerce transactions. It wouldn't be an exaggeration to say that Alibaba (along with fellow Chinese platform companies like Baidu and Tencent) has built much of the core infrastructure of modern commerce in China.

Now, this is not to suggest that platforms can do no wrong. Regulators should (and do) pay close attention to these businesses to make sure they don't abuse their market power. But the types of regulations that worked for monopolies of old aren't likely to work for these modern monopolies. In many cases, platforms have very good reasons for governing their networks in ways that would traditionally be considered anti-competitive. In many cases, these kinds of platform policies are good for the network and for its users. Instead, regulators should be looking for areas where a platform's incentives diverges from that of its users. Otherwise, arbitrarily limiting the market power of these platform businesses will limit their network effects and have a negative impact on consumers.

Platforms are here to stay. The sooner we learn to embrace these modern monopolies' new way of operating, the quicker we'll reap the economic growth and benefits they bring.

Adapted from Alex Moazed's and Nicholas L. Johnson's new book Modern Monopolies: How to Dominate the 21st Century Economy, out now from St. Martin's Press. For more stories and commentary like this, please add me on Snapchat.

 

Published on: Jun 2, 2016
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