Does the Internet Lead to Monopolies?

These days it feels like the internet favors the most successful players in a winner-take-all game. Look at the near monopolies of Facebook, Twitter, Google, Amazon, Craigslist, iTunes, and Pandora. These are some of the examples cited in a recent Forbes article arguing that the internet is fostering monopolistic businesses. But the winner-take-all phenomenon occurs mostly with consumer information services. In business-to-business information the dynamic is strikingly different. Most industries have two and sometimes three highly-competitive information suppliers. Think Westlaw vs. LexisNexis in law; McGraw-Hill vs. Reed in construction; Bloomberg vs. ThomsonReuters in financial information; Wolters Kluwer vs. Elsevier in clinical healthcare information; First Data Bank vs. Wolters Kluwer vs. Elsevier in drug information; Standard & Poor’s vs. Moody’s in debt ratings; and the list goes on.
There are some good reasons for this difference. Consumer information is almost always free and carries few switching costs. Consumers will switch to a new service at the drop of a hat if they believe it is somehow better. B-to-B information typically entails significant fees and is, therefore, a carefully-considered purchase. Switching can be expensive given potential costs to retrain users, adapt workflows to a new vendor, or make changes to internal systems that process such information.
With consumer information, the user and the buyer are the same person. By contrast, in a business, users may be different from buyerd – and their interests may be different. Consider a research analyst in a company who wants a particular information service for convenience regardless of cost, versus a manager whose primary interest may be in meeting a budget even if it means selecting a service that may be only “good enough” rather than the best. In addition, contracts put the breaks on rapid, whimsical switches and also give vendors time to compensate with product upgrades, better pricing, or other ways to retain customers.
Few B-to-B information services benefit from network effects — the increasing value that accrues as more users adopt a specific information service. For example, Facebook gets more valuable to individual users as its overall network grows; the same holds for Skype and PayPal. LinkedIn is one of the few B-to-B services that have enjoyed such a network effect. Others are trading networks and online communities (the majority of which are non-commercial) that may serve specific business and professional communities. But on the whole, few B-to-B information services enjoy such benefits.
The bottom line: Winner-take-all success is most likely to occur when individual users can make their own purchase decisions outside of any institutional constraints and that, in turn, is more likely to happen when services are free.

About Lee Greenhouse

Longtime strategy consultant focused on the business of information content, applications, and services.
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