Applico’s Modern Monopolies Reviewed by Financial Times

The following is an article by Financial Time’s Innovation Editor John Thornill.

The central theme of this stimulating book is simply summarised. Whereas the key to dominating the 20th century economy was to own the means of production, the secret of our own times is to create the means of connection.

The dominant business models of our era will be platform businesses, such as Apple, Google, Facebook, Uber and Alibaba, which enable consumers and producers to connect with each other, facilitate the exchange of goods, services and information, and create their own markets.

Although the idea may be simple, the implications for conventional businesses are colossal. Indeed, the authors — who work at Applico, a New York-based platform innovation company started by Alex Moazed — question whether the classic 20th-century corporation, whose competitive advantage and chief functions lay in lowering transaction costs and arbitraging information deficiencies, can survive. Platforms, they claim, “deliver faster growth, better return on capital, and larger profit margins”.

According to the “theory of the firm” developed by the economist Ronald Coase and cited by the authors, a company “internalises” those activities it can organise more efficiently than the market and “externalises” the rest. But the authors argue that modern monopolies, once established, create near-perfect information flows that help them to expand their networks at near-zero marginal cost, revolutionising the economics of business.

To substantiate their case, the authors cite the devastation of Nokia, the Finnish mobile phone company, and Research In Motion, the Canadian manufacturer of the BlackBerry, which bestrode the corporate world a decade ago. Both companies were smart, rich, cutting-edge technology businesses selling hugely popular products. Yet both were pretty much destroyed by Apple’s iOS operating system and Google’s Android.

As Stephen Elop, then Nokia’s chief executive, acknowledged in his staff memo in February 2011, his company was standing on a “burning platform”. “We’re not even fighting with the right weapons,” he wrote. “The battle of devices has now become a war of ecosystems.”

There is little doubt that Nokia and BlackBerry produced better hardware than Apple’s iPhone. But it was the App Store, which contained 1.5m apps and accounted for 100bn downloads by the end of 2015, that upended the traditional mobile phone market.

Moazed and Johnson are immersed in this evolving business world and are evangelical about its advantages. As well as analysing the dynamics of this new environment, the book also provides a handy if somewhat glib guide to budding entrepreneurs thinking of launching their own revolutionary businesses.

The authors are particularly interesting on how modern platform companies are able to outsource much of their innovation. Whereas traditional businesses still regard themselves as the sole source of value creation, platform companies realise that it is their consumers who create the value and share it with each other. Their most important resources therefore reside outside the company, rather than within. To take just one example, it was Twitter’s users, rather than the company itself, that suggested the symbols @ for usernames and # to link related posts.

The book is weakest in its blithe acceptance of the benefits of modern monopolies. The monopolies’ employees, investors and consumers may agree but it is less clear that governments and citizens will. As the authors acknowledge, some model companies, such as Uber, come with serious regulatory risk. “Many platform businesses are effectively a call option on regulation,” they write.

The authors argue that such platform businesses dominate their markets because the bigger they grow the more valuable they become to users. “Although monopolies get a bad rap, they’re not always a bad thing. In the short term, modern monopolies are often a boon to consumers.”

They do acknowledge that many monopolies are terrible in the long run. But we need not worry because few companies are going to grow old in such a competitive world. If that is the case, then are we right to regard them as monopolies at all?