All's Fair in Love and War, but Hard to Measure in Business

All's Fair in Love and War, but Hard to Measure in Business

     
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All’s Fair in Love and War, but Hard to Measure in Business

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  • They are at it again.

    Over the last 15 years, the competition commissions of many countries—including the U.S. Federal Trade Commission (FTC), the European Commission, agencies in Japan and South Korea, and even the State Attorney-General of New York—have all piled on Microsoft Corp., Intel Corp., and now, Google Inc.

    Arguing that these companies have business practices that limit competition and hurt consumers, the competition bodies have filed lawsuit after lawsuit, levied fines and forced settlements. But not one has made a case in a court of law.

    Microsoft's alleged improprieties are its control of others' access to the desktop real estate of its Windows operating system—and being big. For Intel, the complaint is about its aggressive use of volume discounts to ensure the use of its microchips in PCs—and being big. Against Google is the complaint that it has two-thirds of Internet search advertising (although this is less than 5 per cent of total media expenditures)—and being big.

    The complaints are difficult to argue one way or the other, which is one reason these investigations and lawsuits drag on for years. But two truths are undeniable.

    First, the mandates of competition agencies are to protect consumers from monopolistic practices of companies that reduce competition, thus limiting consumer choice. But none of the complaints against Microsoft, Intel or Google originate with consumers who say they have been hurt. All were from competitors.

    Second, a key measure employed by the FTC is the Herfindahl-Hirschman Index, which compares the size of a supposedly monopolistic company with that of its industry. But size as a measure of market concentration—and even defining what an industry is, who is in it and how big it is—is increasingly more difficult and less relevant today.

    The "laws" that are the basis for business strategy are not exclusively driven by size, but are rooted in the physical, rather than the legal, world. There are four of them.

    The first is Moore's Law—the observation first made by Intel co-founder Gordon Moore, that, every 18 months, the feasible number of transistors that can be etched on a computer chip doubles. This law has prevailed for decades; some experts believe it will prevail for many decades to come.

    The second law is Gilder's Law. Futurist and commentator George Gilder has observed that the cost of bandwidth in networks falls by half virtually every year, driven by continuing technological innovations.

    The third is Metcalfe's Law. Robert Metcalfe, inventor of the Ethernet, first observed that the value of a network is proportional to the square of the number of people using it. For example, the value to you of having an e-mail address is proportional to the number of associates who also have one. Double the number of participants, and the value to each participant is also doubled, with the value of the overall network increasing fourfold. The cost of the network, however, increases only linearly, in relation to the number of new users added.

    The fourth is Coase's Law. Ronald Coase is a Nobel Prize-winning economist working in what is called the theory of the firm. He observed that transaction costs are a key determinant of a company's scope of activities. When transaction costs are high (for example, when it costs a lot to do things in the open market), companies tend to take on many diverse tasks, figuring it is more efficient to do it themselves. When transaction costs drop, companies can become more focused, outsourcing activities. As electronic networks arise, the transaction costs of open-market interactions go down, enabling increasingly focused and specialized firms.

    All of these laws will remain at their current pace for at least the next decade. This means an increasingly diverse and focused range of companies, with many new business models emerging.

    These laws also mean that the informational "glue" that defined the boundaries of industries and companies is dissolving, enabling industries to be redrawn again and again. Companies can no longer rest comfortably in a market position but must continually cannibalize their own and their competitors' positions; incumbents must go on the attack to remain viable.

    The implications are already clear in several markets. Unlike antitrust laws that work to "balance" competition so that three or four players have "fair" competitive positions, these physical laws will cause many markets to be led by one player that gains such a strong advantage that competitors may cry "unfair."

    These competitors will not target product-market niches, but instead define their business as the layers of events and processes that produce a product or service, as Microsoft and Intel have. This will happen not only in high-tech and communications but also in industries such as biotech, media and retail.

    We already see successful strategies of "layer mastery" in payments processing, contract electronics manufacturing, and aircraft leasing. Industries and markets will be redefined in ways that will make the traditional assessment of "fair" increasingly difficult.

    Companies need the strategic freedom to seek—and reseek—leading competitive positions. Given the forces at work in our global economies, freedom to compete will continue to be the root cause of economic progress, not "balance" or "fairness."

    This piece was originally published in the Globe and Mail.
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