Monday, January 14, 2008

All good monopolies come to an end

Anyone who teaches strategy ends up teaching some aspects on industrial economics, specifically Michael Porter’s Five Forces. Generally instructors need illustrative examples of the two extremes: a highly competitive, low-profit industry and an oligopoly (or monopoly) with high profits.

As I’ve said before, if you want to make money, nothing beats a good monopoly. But a good oligopoly comes close: a favorite industry for illustrating this point is the pre-Napster recording industry, ca. 1995. (Obviously a lot has changed in the last decade).

With undergraduates, I need something to illustrate the concept of formal entry barriers, such as a government-controlled monopolies. Cable TV — one franchise per city — is pretty easy for most to understand. And, in fact, it’s been a very lucrative business for the past few decades to own.

This month’s (Jan. 28) Forbes looks at the recent decline in the market power of Comcast, one of the top 4 cable operators (a national oligopoly, each with a local monopoly). It focuses on the ability of the Internet to deliver content while bypassing the last mile monopoly for TV.

An interesting commonality between record labels and cable TV operators is that they didn’t face increased competition — the entry barriers to their traditional business remain as before. Instead, the threat comes from substitutes enabled by technological change — either things that weren’t possible to do before, or things that were possible but now have become more attractive substitutes.

Are substitutes the most likely cause of ending monopoly power? Another example is the world’s richest man (no not Bill Gates) who bought CompUSA — the biggest US computer store, pinched between general electronics retailers on one side and online retailers on the other.

Normally in teaching business we teach that profits are good and competition is bad. (Sorta the opposite of economics, where competition and consumer welfare are good). But in this case, substitutes can provide market entry for those blocked by the old entry barriers — openness that is bad for one part of the value chain is good for another part. It hasn’t changed the lot of independent record labels (yet), but clearly video producers have a way to bring content to market that they never had in the days of the big three TV networks and the subsequent cable oligopoly. (Not counting new business models like JibJab, which wouldn’t exist without the Internet).

1 comment:

Alan S Michaels said...

Thanks Joel.

To fill your need in illustrating the concept of formal entry barriers, such as a government-controlled monopolies, how about analyzing and publishing results on the education industry sector?

There is a lot to choose from, including primary and secondary schools, two-year colleges, four-year liberal arts colleges, and multiple graduate specialties - all with government intervention as a competitor and a rule setter, with a near monopoly in childhood education.

Will the Internet also change the rules enough to benefit substitutes like home schooling and college degrees via distant learning courses?

Alan S. Michaels