Some argue the regulatory framework needs to adjust for a new kind of market dominance.

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The word monopoly has a distinctly nefarious ring to it, conjuring up images of thuggish industrialists in smoky rooms, scheming to undermine their rivals.

Yet in technology, it’s not at all uncommon for one company to dominate a particular field. Google is the runaway leader in online search. Facebook is the largest social network in the world by a wide margin. Amazon is far and away the biggest e-commerce site.

Even among so-called unicorns — private startups worth $1 billion or more — de facto monopolies are already the norm. As technology writer Om Malik argued in The New Yorker recently, “Most competition in Silicon Valley now heads toward there being one monopolistic winner.”

Airbnb dominates the apartment-rental market, Snapchat is the big player in ephemeral messaging, and Spotify stands out as the major streaming-music library. And when it comes to on-demand ride services, Uber, the most valuable private company in the world, is the clear leader.

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But while market dominance is hard to break, that doesn’t stop upstarts from trying. In the case of Uber, it is Lyft that is doing its best to keep up.

Earlier this month, Lyft raised an additional $1 billion from investors including General Motors, increasing its total fundraising to $2 billion. At the same time, it announced it was developing software for self-driving cars and teaming up with GM to put more drivers on the road.

These moves are part of Lyft’s bid to distinguish itself and avoid being muscled aside by the runaway market leader, an all-too-common experience for technology companies.

“We’re gaining share in the United States,” said John Zimmer, Lyft’s president and co-founder. “That’s not what happens when one player has a complete monopoly.”

Regardless of whether Lyft and Uber can both thrive, or if there is only one big winner in the booming ride-hailing industry, dominance in and of itself is not illegal.

Problems arise only when a company “unreasonably restrains competition” or gains and holds power “through improper conduct,” according to the Federal Trade Commission’s (FTC) definition of monopolization.

Indeed, there is a line of thinking that celebrates monopolies. In a unanimous decision from 2004, the Supreme Court said the ability to create a monopoly was a powerful incentive that should be protected.

“The mere possession of monopoly power, and the concomitant charging of monopoly prices, is not only not unlawful; it is an important element of the free-market system,” Justice Antonin Scalia wrote in that opinion. “The opportunity to charge monopoly prices — at least for a short period — is what attracts ‘business acumen’ in the first place; it induces risk-taking that produces innovation and economic growth.”

In the book “Zero to One,” which he co-wrote with Blake Masters, investor and PayPal co-founder Peter Thiel offers tips on how to create monopolies, arguing that once achieved, they lead to more innovation.

“Monopolies drive progress because the promise of years or even decades of monopoly profits provides a powerful incentive to innovate,” he writes. “Then monopolies can keep innovating because profits enable them to make the long-term plans and to finance the ambitious research projects that firms locked in competition can’t dream of.”

Nor have regulators been cracking down. Given how many big technology companies loom large in their respective markets, there have been relatively few big antitrust actions brought against high-tech giants. (The Microsoft antitrust case of the 1990s is one notable exception.)

“This is different from the old monopolies of the industrial age,” Robert Reich, the former labor secretary, said of technology companies.

Unlike U.S. Steel or Standard Oil, two of history’s biggest brutes, today’s tech monopolies are rarely the exclusive provider of an essential commodity. Instead, many achieve their initial dominance by distinguishing themselves in a crowded marketplace, then rapidly taking market share, thanks to the power of network effects — that is, the more people use a service, the more valuable that service becomes to other people, who join in and make the service all the more popular.

Network effects helped Google, Facebook and Amazon run away from their competitors and are helping Uber today. Google wasn’t the first search engine, Facebook wasn’t the first social network, and Amazon wasn’t the first to sell goods online. There are still myriad other sites for search, social and e-commerce. But despite an array of options, users keep coming back to Google and Facebook.

Some argue, however, that the regulatory framework needs to adjust for a new kind of market dominance.

The underlying problem here is that antitrust regulators are only looking at consumer welfare,” Reich said. “They aren’t looking at the long-term potential for total dominance of a network, the possibility of predatory behavior once a technology giant becomes entrenched, or political power.” (European antitrust laws are more expansive than those in the United States, resulting in continuing actions against Google and other big tech companies.)

Along with network effects, another hallmark of today’s tech monopolies is that, perhaps fearing obsolescence, they diversify. While Microsoft still makes its Windows and Office software, it also owns Skype and has a big video-gaming business.

Google is now a subsidiary of Alphabet, a new parent company that is also home to a health-care company, a self-driving cars division and a venture-capital firm. Amazon is expanding its cloud-computing and streaming-media businesses. And Facebook has diversified into messaging with WhatsApp, photos with Instagram, and virtual reality with Oculus Rift.

This, too, creates challenges for regulators. When mergers and acquisitions are part of the natural life cycle of startups and venture capital, it isn’t easy to block deals that might hypothetically reduce competition down the road. As a result, regulators have blessed many acquisitions that, to critics, appear to be deeply anti-competitive.

Gary Reback, a lawyer who helped prompt a landmark antitrust investigation into Microsoft and is now pursuing Google in Europe, argues that Google bought its way to dominance in online advertising through the acquisition of DoubleClick, bought its leadership in mobile by purchasing Android and bought its strong mapping franchise in the deal for Waze.

Similarly, Facebook bought two of its nearest rivals, Whats­App and Instagram. If any of those deals had been blocked, Reback argues, behemoths like Google and Facebook might today be facing more concerted competition.

“Once one of these companies gets a monopoly, it’s easy to spread the monopoly to adjacent markets by acquisition,” Reback said. “You would think antitrust enforcers would know this by now.”

While monopolies in the tech industry are perhaps easier than ever to achieve, industry experts contend they are also more vulnerable than ever before. The advent of the smartphone and widespread access to broadband Internet connectivity have democratized access to creative new technologies.

“Sun Microsystems. EMC. Cisco. All these were considered the dominant market players in their category at the time,” said Rich Wong, a venture capitalist at Accel Partners. “Then the vast majority of them got whacked by this thing called the cloud.”

And, of course, billions of people browse the Web without Google, use other social-networking apps besides Facebook and shop on websites besides Amazon. Although no upstarts have replaced them yet, they are not immune to disruption.

As for Uber, if it’s not a monopoly already, it is the giant in the ride-hailing market, at least in the United States. One rival, Sidecar, shut down last month, and Lyft is its last meaningful competitor on a national scale. (Uber faces a tougher road abroad, where it is tangling with regulators in Europe, recently withdrew from Frankfurt and is fighting against entrenched rivals in China and other international markets.)

As the underdog, Lyft is trying to put more drivers on the road and acquire new users. Like Uber, the company is private, and neither shares much information about performance.

But Zimmer said the company was quickly increasing market share in the United States. He also sees the on-demand ride business as different from search or social media and more like telecommunications companies, where several big competitors can compete on service.

“Just like AT&T and Verizon need three bars of coverage,” he said, “we get down to two to three minutes of wait time for a vehicle to arrive. Once it gets to that point, there’s no difference in behavior between services. That’s when you compete on experience.”

Still, Lyft will be hard pressed to unseat Uber.

“The network effects hold competition at stiff arm’s-length,” said Steve Cheney, an entrepreneur and co-founder of Estimote, a micro-location platform for mobile developers.

Or perhaps the ride-hailing market is big enough for both Uber and Lyft.

Monopolies don’t necessarily mean there is no competition whatsoever. While a company like Uber may take a huge lead in market share, others, like Lyft, may still have room to profit and even prosper. Even Google has not managed to squash every search engine.

“Microsoft has a decent search business. A lot of Yahoo’s profits still come from searches on Yahoo properties,” said Roelof Botha, a partner at Sequoia Capital, the venture firm that has investments in What­­­s­App and Airbnb. “It’s more of a ‘winner takes most’ than a ‘winner takes all’ phenomenon.”

Should that be the case in the ride-hailing industry, Uber and Lyft may become something truly competitive by Silicon Valley standards: a duopoly.

 

UBER LYFT
2010 Year founded 2012
San Francisco Headquarters San Francisco
Travis Kalanick CEO Logan Green
More than 300 U.S. cities More than 200
Bellingham, Seattle, Spokane, Tacoma and Vancouver Washington cities Everett, Kent, Seattle, Spokane and Vancouver
68 Countries 1
400,000-plus (in U.S.) Drivers 315,000-plus
$62.5 billion Value $5.5 billion
Sources: Uber, Lyft.