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Hardly a week goes by without headlines and op-eds expressing worry about the supposed power of tech companies. Martin Giles of the MIT Technology Review called Facebook, Amazon, and Google “data barons” and suggested that the government should rein them in. Michigan State University’s Adam Candeub worried in The Wall Street Journal that tech’s “cash-rich internet moguls” are expanding too fast and advised that the Federal Trade Commission should better scrutinize mergers.
Such calls for more aggressive government oversight are often based on several logical fallacies and cognitive biases, such as the name calling mentioned above. Another error that seems to occur over and over is lumping dissimilar companies together. This facilitates more logical fallacies than I care to try to name, but the association fallacy (using an irrelevant association) and reductionism (oversimplifying) come to mind.
How can we think clearly about rivalry in the tech industry? This requires answering three questions: Who really is in the tech space? Where do these companies experience competitive pressure? What is the nature of rivalry in digital markets? I address the first two questions in this blog, and a following blog will address the third question.
Is there such a thing as a tech industry?
Yes, but not in a traditional sense. Tech Nation defines a tech business as one “that provides a digital technical service/product/platform/hardware, or heavily relies on it, as its primary revenue source” but admits that people are pretty loose with the definition. For example, Inc. magazine describes a salad restaurant chain, Sweetgreen, that considers itself a tech company because it uses an algorithm to make ordering more efficient.
To illustrate the muddle, consider how the US government classifies five companies that are often identified as characterizing the tech industry: Alphabet Inc. (Google’s parent company), Amazon, Apple, Facebook, and Microsoft.
Since 1937, the government has used Standard Industrial Classification (SIC) codes to classify industries. Factiva provides the relevant codes. Based on their codes, the five companies don’t appear to be related. Alphabet and Facebook are in a services division (7375: information retrieval services). Amazon is in retail trade (5963: direct selling establishments). Apple is in manufacturing (3663: radio and television broadcasting and communication equipment). And Microsoft is in services (7372: prepackaged software).
Are these classifications useful? Apparently not. According to economists Lasse Lien and Peter Klein, SIC codes are poor instruments for understanding how companies relate. Lien and Klein appear to be correct. According to SICCODE.com, Alphabet and Facebook are in the same SIC code as NTT Data and The New York Times. Webster Online shows Amazon is in the same SIC code as Capital Newspapers and Amway.
If industry classifications aren’t helpful, maybe it would be useful to see how companies experience competitive pressure.
Who competes with whom?
MarketLine provides a list of key competitors for each of the five companies. Figure 1 summarizes MarketLine’s view.
Figure 1 shows the five companies of interest in bold text. The arrows show the directions of competitive pressure. For example, the one-directional arrow from Amazon to Microsoft shows that Amazon provides competitive pressure to Microsoft. The two-way arrow between Facebook and Alphabet shows that they provide competitive pressure to each other. The arrows emanating from companies in plain text, such as Red Hat and IBM, show to which of the five companies these other companies provide pressure. I omit any competitive pressures going to the companies in plain text.
Based on counts of the connections to each of the other four companies of interest, Microsoft is the most intertwined. Alphabet is the next most intertwined with three connections. Measured in terms of the number of arrows pointing at them, Microsoft and Alphabet have the most competitive pressure (three each) from others in the group of five.
Amazon is clearly different from the other five. It has no major competitive pressure from the other four according to MarketLine. Also, eBay is the only tech-like company that provides competitive pressure to Amazon. Almost all of Amazon’s pressure comes from traditional retailers, such as Target and Walmart.
And the competitive pressures are asymmetric. Half of the six arrows that connect pairs of five companies of interest go only one direction. Amazon provides pressure to Alphabet and Microsoft but gets little back. And Microsoft provides pressure to Alphabet but gets little back.
How should this rivalry be understood?
I will focus on this issue in my next blog. For now, suffice it to say that the rivalry is nontraditional and understanding it requires rethinking our notions of market competition.
(Disclosure statement: Mark Jamison provided consulting for Google in 2012 regarding whether Google should be considered a public utility.)
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