When NYU economist Thomas Philippon moved to the United States from France in the 1990s, he noticed everything from laptops to internet access was cheaper in America. But over time, as the access industry consolidated, prices slowly rose and now Americans pay more for data than almost every other country worldwide.
In his new book, The Great Reversal: How America Gave Up on Free Markets, Philippon sets out to examine why that happened, and why there’s so little competition in American markets. I don’t often directly recommend books on the show or the site, but I think everyone in tech or interested in tech ought to read this book — it provides a rigorous, but easy-to-grasp look at the economics of consolidation and what it does to markets, prices, and products.
There are two things that really jumped out to me during this conversation: first, that concentration can actually be good and create value for the consumer, because healthy competition weeds out poor performers and rewards the winners, but concentration due to lobbying and political influence has the opposite effect.
The second is something I’d never really thought about, but makes perfect sense: Philippon pointed out that companies going bankrupt is actually a sign of an efficient, competitive market, because it means companies have to price their products and services very low in order to compete, instead of extracting as much profit as possible. Those low margins are treacherous, and it means that some companies simply won’t survive — but having enough companies to create that pricing pressure and actually go bankrupt is a sign there’s competition in the first place.
That idea really changed how I think about so many tech businesses that give things away for cheap or free. Take streaming services, where Disney, Apple, and Amazon are all now selling very expensive programming for very cheap. Here’s how longtime streaming execs Matthew Ball and Alex Kruglov described the economics of streaming in a piece for Vox yesterday:
If you actually want to make money, subscription streaming shouldn’t even be your real business. Instead, give it away as a free or low-cost perk that’s part of a much higher-margin and less-competitive business, such as wireless service, smartphones, e-commerce subscriptions, or theme park passes. Better still, use your service to make money by selling other people’s unprofitable video services.
It looks like there’s competition in streaming, but it’s all subsidized by monopolies in other businesses, and pure streaming companies might get priced out of the market because huge competitors like Disney and Apple are actually willing to lose money on streaming to maintain their huge profits elsewhere.
If you have been listening to The Vergecast and been paying attention to our larger conversations about whether we should be breaking up big tech companies, whether we should regulate them, or whether tech companies with network effects like Google and Facebook are different than companies like AT&T and GE, this episode is for you. Below is a lightly edited excerpt of the conversation……..Read More>>