Does the Internet favor monopolies?

Does the Internet favor monopolies? That's the theory of Columbia University's Tim Wu, who notes that other network-based industries have consistently moved toward concentration.

Think of the telegraph and the telephone industries and you'll immediately see what he means: In each case, the more users who join a dominant network, the more valuable the network becomes to everybody - the users and the network's owners alike. Facebook is just the latest example.

Wu, co-author of 2006's "Who Controls the Internet?" and an expert in telecommunications law, described the problem this weekend in a provocative commentary in the Wall Street Journal:

How hard would it be to go a week without Google? Or, to up the ante, without Facebook, Amazon, Skype, Twitter, Apple, eBay and Google? It wouldn't be impossible, but for even a moderate Internet user, it would be a real pain. Forgoing Google and Amazon is just inconvenient; forgoing Facebook or Twitter means giving up whole categories of activity. For most of us, avoiding the Internet's dominant firms would be a lot harder than bypassing Starbucks, Wal-Mart or other companies that dominate some corner of what was once called the real world.

The Internet has long been held up as a model for what the free market is supposed to look like—competition in its purest form. So why does it look increasingly like a Monopoly board? Most of the major sectors today are controlled by one dominant company or an oligopoly. Google "owns" search; Facebook, social networking; eBay rules auctions; Apple dominates online content delivery; Amazon, retail; and so on.

There are digital Kashmirs, disputed territories that remain anyone's game, like digital publishing. But the dominions of major firms have enjoyed surprisingly secure borders over the last five years, their core markets secure. Microsoft's Bing, launched last year by a giant with $40 billion in cash on hand, has captured a mere 3.25% of query volume (Google retains 83%). Still, no one expects Google Buzz to seriously encroach on Facebook's market, or, for that matter, Skype to take over from Twitter. Though the border incursions do keep dominant firms on their toes, they have largely foundered as business ventures.

The rise of the app (a dedicated program that runs on a mobile device or Facebook) may seem to challenge the neat sorting of functions among a handful of firms, but even this development is part of the larger trend. To stay alive, all apps must secure a place on a monopolist's platform, thus strengthening the monopolist's market dominance.

Today's Internet borders will probably change eventually, especially as new markets appear. But it's hard to avoid the conclusion that we are living in an age of large information monopolies. Could it be that the free market on the Internet actually tends toward monopolies? Could it even be that demand, of all things, is actually winnowing the online free market—that Americans, so diverse and individualistic, actually love these monopolies?

The history of American information firms suggests that the answer to both questions is "yes." Over the long haul, competition has been the exception, monopoly the rule. Apart from brief periods of openness created by new inventions or antitrust breakups, every medium, starting with the telegraph, has eventually proved to be a case study in monopoly. In fact, many of those firms are still around, if not quite as powerful as they once were, including AT&T, Paramount and NBC.

The good news? Wu says we're still in the "golden age" of these burgeoning Internet monopolies, and thus still reaping benefits. On the other hand, he warns that won't last:

Today, a single search engine has made virtually everyone's life simpler and easier, just as a single phone network did 100 years ago. Monopolies also generate enormous profits that can be reinvested into expansion, research and even public projects: AT&T wired America and invented the transistor; Google is scanning the world's libraries.

The downside shows up later, as the monopolist ages and the will to innovate is replaced by mere will to power. In the 1930s, AT&T took the strangely Luddite measure of suppressing its own invention of magnetic recording, for fear it would deter use of the telephone. The costs of the monopoly are mostly borne by entrepreneurs and innovators. Over the long run, the consequences afflict the public in more subtle ways, as what were once highly dynamic parts of the economy begin to stagnate.

Wu isn't sure how to address the problem, and it's also clear that there are big differences between a monopoly based chiefly on a costly build-out of network infrastructure and what Facebook, for example, has created.  But other examples of what he calls "information monopolies" make the comparison clearer.

Click here to see the rest of Wu's piece.