Many industries in the US are highly concentrated with a handful of players dominating the market. In the past I have written about the monopoly and oligopoly madness in many industries. Some of these articles can be found here, here, here, here, and here. In this post, let me discuss about the market concentration in the IT sector quoting from a recent article at Schroders.

Sean Markowicz, CFA at Schroders discussed the growing influence of superstar firms in the US IT industry. From the article:

Why has this happened?

Technological innovation has significantly transformed the US competitive landscape. The proliferation of digital products and intangible inputs such as data and software have enabled tech firms to rapidly acquire new customers and dominate their respective market at virtually zero marginal cost. Some industry leaders have also benefitted from the network effects that are present on social media platforms, where the value of their service increases with the number of participants.

These effects have been particularly marked in the IT sector. For instance, Google receives 88% of all US internet search activity, Facebook controls 42% of US social media and almost all mobile operating systems are provided by either Apple (iOS) or Google (Android). The dominance of these digital platforms and products have created powerful barriers to entry for competitors.

 

Competition has been further weakened by the flood of mergers and acquisitions (M&A). Over the past three decades, the average number of US M&A deals per year increased from around 5,600 to more than 10,000. Lax antitrust enforcement has facilitated this wave of market consolidation, as regulatory authorities have challenged fewer deals on anticompetitive grounds than in the past. This has paved the way for large companies in industries such as telecoms, pharmaceuticals and airlines to consolidate their market shares. (emphasis mine)

Source: The rise of US superstar firms and its implications for investors, Schroders

Some of the reasons why the IT sector is highly concentrated just like so many other industries include:

Lax antitrust enforcement of laws. About a century ago, monopolies were hated and anti-trust enforcement was strong. Over the decades high lobbying and a general antipathy towards anything has led to the situation where giants continue to gobble up smaller companies with impunity and without fearing any regulatory intervention.

Greed is another factor that has destroyed competition in the industry. For example, early investors such as venture capitalists try to cash out as quickly as possible as opposed to growing a company for years.

Young founders of all the startups are not interested in creating huge companies such as Google(GOOG) or Microsoft(MSFT). Their dream is to sell out their startup at a good price to one of the giants and cash out. There is no need to be patient or try to demolish Apple(AAPL) or Amazon(AMZN) in the next 20 years or 50 years. In fact, many of these founders boast when their firm is acquired by the big firms.

Venture capitalists is another group that deserves mention for the sorry state of competition. Contrary to popular belief they do not want thousands of companies competing for their share of the pie. Instead they want to create firms that use monopoly power to highest extent legally possible and cash out at the right time as well. During the dot com era, decent search engines such as Looksmart, Altavista, Yahoo, etc. were completely abandoned as the new star Google came into the picture. The rest as they say is history.

Disclosure: No Positions