Is the Internet under threat from online monopolies?

With the European Union formally accusing US digital major Google of monopolistic practices, Internet giants as a whole have come under the spotlight. If regulation is developed on controlling Internet monopolies, the web could be transformed for both large and small companies, with both pros and cons in such a scenario. This issue could certainly transform how financial hubs, such as London corporate finance, approach investments in the Internet space.

Unlike companies that function primarily in physical services and goods offline, the issue of monopolisation becomes more difficult to define in virtual terms. While the Internet provides an extremely competitive platform in itself, the dominance of specific online players is so extreme that it creates discomfort among regulators.

The web, more so than physical marketplaces, provides an especially powerful catalyst for mushrooming quasi-monopolies. In large part, it is because innovation is rewarded handsomely online – market pioneers are typically able to create such a gap between gradually emerging rivals that their brand recognition becomes difficult to overcome.

This point is well demonstrated by today’s online powerhouses. Alibaba was the online retail pioneer in China and in 2014 controlled about 80% of the country’s e-commerce market. Google provided the most user-friendly search engine at a time of limited competition and now controls over 90% of Europe’s online searches. Amazon revolutionised the online book sector, controlling more than 50% of the US book market today.

Unlike in physical products such as hydrocarbons, tobacco or cars where market share can be won by smart marketing and savvy corporate takeovers, an online product achieves dominant brand status more on merit and consumer feedback. Internet users can instantly access, use and rate an online service, meaning Internet companies can fail as rapidly as they can expand. This organic monopoly process can still be observed among contemporary start-ups, which avoid competing with incumbents and instead choose markets that are underdeveloped or non-existent. Online taxi ordering service Uber created a new industry for private drivers within a few years while Airbnb has developed a global home-sharing network out of nothing – both companies have near total monopolies over their segments today.

The popularity of an online service attracts more users and creates a self-perpetuating effect, allowing the service to collect more data than other market players. This in turn allows it to better mine this data for insights and service improvements. Internet users are also notoriously lazy, preferring to extract most of their needs from a single platform. This in effect is the “Google dilemma” – the company provides the best and most expansive services as part of its search offering and is thereby the platform of choice for many consumers. Stopping or regulating this accelerating monopolising process is much more difficult online, as opposed to restrictions that can be implemented in other markets (such as limiting acquisitions or enforcing greater transparency.

These factors mean that states should strive to regulate Internet monopolies less forcefully than offline ones. One of the web’s key economic advantages, from which most countries benefit, is that an online start-up has fewer legal and infrastructural barriers to market entry and can therefore gain visibility and expand rapidly. Israel, for instance, has been able to produce some of the world’s most successful Internet innovators despite the small size of its economy and remote location

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