How I Learned to Stop Worrying and Love the Monopoly
Successfully building a business with potential to extract monopoly-like profits is a prize that, so far, has moved civilization forward faster than any other pot of gold at the end of any rainbow. It’s the carrot of capitalism that has pulled more people out of poverty and improved more lives than any other system in the dozen millennia since we settled down from our hunter/gatherer lifestyle.

Monopolies are awesome. Well, at least for a while, but then they get a little too big, a little too powerful, and sometimes a little too greedy. Maybe it’s intentionally bad behavior, maybe it’s just the system they operate under, or maybe it’s just a law of nature. Then society and the government catches up and restricts monopolies either by placing guardrails on them or breaking them up. In doing so, we often see the phenomenon of regulatory capture: new regulation cements current monopolies by raising the barriers to new entrants. Monopolies are kept in their lanes and they can’t enter new vertical or horizontal businesses. Sometimes, this regulation turns into a quagmire of unintended consequences with devastating impacts, where big business and big government create significant damage and inequality – it's a tale as old as capitalism. 

Certain gears of civilization, like technology, turn faster than others, like government. Eventually the government gear spins fast enough to catch up...and then technology races ahead again. We’ve seen this phenomenon over and over in multiple industries over the last 200 years – it's at the heart of our paper Pace Layers: Tech Platforms, Regulation, and Finite Time Singularities.

As monopolies amass more power, they eventually slow down under their own weight. They reach the top of their classic S-curves, providing welcome governors or brakes, on the pace of progress. In this sense, monopolies are an effective mechanism to slow down time (we talked in more detail about the importance of slowing down time in our paper Redefining Margin of Safety). If they propelled us forward at an unstoppable pace, innovation and progress would run too fast for the slower layers of society to catch up. On the flipside, if we had perfect textbook competition, we would probably either end up with 1) severely attenuated innovation (as there would be little chance of gaining majority market share and amassing a pot of gold, and thus there would be reduced motivation to try), or 2) creative destruction would move society forward at an unstable pace in a state of ongoing punctuated equilibrium.

Monopolies can be good for humans because they allow innovation to push us forward as fast as possible without completely breaking the machine. They allow more people to live better lives in total over time. And, when the government catches up and cements their position while keeping them from expanding their territory, they can often enable brand new businesses and innovation to thrive. AT&T birthed the semiconductor. Standard Oil enabled cars. Microsoft built the monopoly operating system of the PC, and then, through government action, enabled Google, Amazon, Facebook, etc. who in turn enabled Uber, Lyft, AirBnB, and countless new and innovative businesses. If Microsoft had controlled the Internet, we’d be much worse off, but if Microsoft didn’t exist at all, or was created decades later, we wouldn’t have seen the massive waves of innovation that have positively impacted lives around the world.

There are, however, many instances of destructive government involvement enabling destructive monopolies – such as the case with the entire US healthcare industry. The banking and agriculture sectors are also examples of monopoly-government relations gone bad. But, even then, the outcomes are not entirely black and white. Monsanto has a near monopoly in seeds and pesticides, but their mission was to feed the world. The complexities here require us to be very thoughtful about the interplay of innovation, monopolies, lobbying, and regulation. In particular, the political lobbying machine in the US has murdered innovation in industries like healthcare and finance, and there’s a good chance the ramping political engine of Silicon Valley could do the same damage in the tech sector as well. 

In the Information Age, monopolies will form faster and accumulate more data and network effects than in the Industrial Age, which is a problem because they can do more damage at a faster pace. There are victims along the way, and it’s a philosophical question as to whether the harm justifies the lifting of countless others out of poverty (oversight and a case-by-case analysis is warranted here). Clearly, the progress of capitalism has harmed the environment and stretched inequality to a breaking point; however, we can’t go back to living in caves. These are issues humans need to solve as the first round of Information-Age giants are regulated to enable the next round of AI, augmented reality, IoT, and other innovations we can’t even yet imagine. 

We cannot approach regulating Information-Age monopolies the same way we tackled Industrial-Age giants, which brings us to our paper Tech Regulation: Jamming a Power Law Back into a Bell Curve Won’t Work. Rather than over regulate, break up, or punish Information-Age monopolies, we should instead free the data. Consumers and companies should have 100% control of who collects what data when, and which companies can use that data. We should have complete control of our data and we should be able to allow new, innovative companies access to that data to build new products to improve more lives – to build the next generation of monopolies that, 20 years from now, will require regulatory action. I look forward to reading about that situation on my augmented-reality glasses while I am flying in my autonomous, electric copter eating sustainable, lab-grown meat while free of all the medical conditions for which I am genetically at risk. 

I’ll bet it’s monopoly-like businesses that create the innovation that solves the environmental crisis, the healthcare crisis, inequality, and other challenges facing humans in the 21st century. At NZS Capital, we believe it’s those companies creating maximum non-zero-sum, or win-win outcomes, that will be the preeminent businesses of the future: rendering themselves irreplaceable to their customers, insulating themselves from competition, and creating more value for their customers, employees, and the world than they create for themselves. The principle of NZS is a logical way for Information Age platforms, and even monopolies, to secure their own success and propel the world forward.

So, we would do well to stop overly worrying about monopolies because they will enable the most progress for society. That's not to say we shouldn't keep a watchful eye, and step in with a heavy hand when necessary, but we should not attack large companies or billionaire entrepreneurs as an evil to be eradicated from the planet. Eventually, monopolies will either collapse under their own weight, or they will be limited by regulation. However, negative feedback loops of government regulation, regulatory capture, and lobbying can cripple innovation and progress. We should be especially sensitive to this potential risk today with tech platforms and push for regulation via data democratization and personal control. 

The Following Two White Papers explore NZS Capital’s thoughts on regulation and the technology sector.

Tech regulation: trying to jam a power law back into a bell curve won’t work (PDF)

Pace Layers: Tech Regulation (PDF)