Size matters in the brave new world 28/2/01

EVAN DAVIS:
With dotcom debris strewn over the business landscape, the new economy is not panning out quite as the prophets hoped a year or so ago. The small fry are struggling.

JAMES LOVE:
CONSUMER PROJECT ON TECHNOLOGY
The giants are dominating the horizon. Some fear the brave new economy is a world of large monopolies. The internet is based on open standards. Nobody owns the fundamental technology it runs on. The internet was sort of designed with competition in mind. Now, if you turn that model over to Time Warner AOL on the one hand, and Microsoft on the other, you have to ask yourself whether they preserve the pro-competitive issues of the internet or whether they try and undermine that with a more proprietary closed architecture.

DAVIS:
But do we have to worry more about monopolies today than in the past? In the old economy, physical things like coal or steel created value. In the new economy, it's supposedly intangible intellectual property that matters, software, design etc. But intellectual property differs, from, say, steel. For one thing it doesn't get used up. A film still exists however many people see it. For another thing, when you create intellectual property, the pattern of costs is decidedly bizarre. You make a film and software once, incur costs once and then you can disseminate it relatively cheaply. So large companies like Microsoft, who can sell their intellectual property widely, will do so more cheaply than small firms who only have a few customers to share those upfront costs. John Howkins has experience in the creative industries. His book on how people make money from ideas comes out in June. He worries about the inexorable logic of scale in the new economy.

JOHN HOWKINS:
AUTHOR, "THE CREATIVE ECONOMY"
It's called a network effect. If you put out your product, and it's a communications device, you put out your product to a certain critical mass of people, then you, in effect, stop anybody else from getting it to the market. I didn't use Microsoft Word for some time. I'm an Apple Mac user. After a bit, I found it impossible to use that software. I had to join the crowd.

DAVIS:
It's not just the network effect. The mega merger between Time Warner and AOL last year, creating a conglomerate of 85,000 employees, spanning magazines and film to cable television, raised serious concerns that the best advice to companies is to create a monopoly in the media and internet worlds.

HOWKINS:
If you can, you have to be a publisher, own TV channels, cable channels, satellite channels, have your own video label, have your own publishing arm, have your own CD-ROM publishing arm, your own website. You create a band and distribute it all the way through. That's where monopoly is beneficial and that's why companies are trying to get bigger and have more of each of those distribution outlets.

DAVIS:
Beneficial to the companies. Is it something the public authorities need to watch out for?

HOWKINS:
Absolutely.

DAVIS:
But there is another point of view. Monopolies have always come and gone. Some economists think the first instinct at a time of economic change is to worry about monopoly, a worry not always warranted.

JOHN KAY:
AUTHOR, "FOUNDATIONS OF CORPORATE SUCCESS"
A hundred years ago, people used the same arguments to say there would only be one tobacco company, one oil company, one steel company. US Steel were created by what was then the world's largest merger, and it was steady decline from there. Today they're not only not the biggest company in the world, they aren't even the biggest steel company in the world.

DAVIS:
Indeed, in some industries like broadcasting, technology is arguably making the world more competitive, not less.

KAY:
Programming and electronic media were dominated by the BBC and a small number of terrestrial broadcasters. They've lost that dominance. Now people keep thrashing around believing that if only you get hold of some delivery mechanism, whether it is internet portals, or the last mile into people's home or the content, you can reclaim the monopolies that used to exist in electronic media businesses 10 or 20 years ago. But the truth is, that's not going to happen. There's free entry into all these businesses now.

DAVIS:
So, can the big guys build a monopoly with a merger or two, or is there life for competition? Is it to be "Small is beautiful" or "Big is better"? So far, the new economy has not offered a clear answer. It will have to do so soon.