Is the Tech Startup Industry Dying?

Jan 12, 2018 2:30:38 PM / by Sterling

When was the last time you used a search engine that wasn't Google, or a social media outlet that wasn't owned by Facebook? For most Americans, it's probably been a while. In fact, market-research figures have shown that Google gets about 77 percent of U.S. search advertising revenue, Facebook's share of mobile social media traffic is about 75 percent, and Google and Facebook combined control about 56 percent of the mobile ad market. And let's not forget about Amazon, which takes about 70 percent of all e-book sales and 30 percent of all U.S. e-commerce. This trifecta, along with the other big players in the tech industry are thriving, and poised to quickly buy out any startups that represent a potential threat or asset.

Mergers and acquisitions in the tech sector have reached an all time high, and are projected to continue accelerating in 2018. These M&As primarily consist of big tech companies gobbling up the smaller innovators, many of whom benefit enormously by partnering with the bigger players, or even have an M&A as the goal from the start. While you can't blame these startups for making the most profitable decision for their business, the trend toward more M&As in tech has brought up some major concerns. As the big companies eat up more and more of the smaller ones, they gain more power to push out rivals and become "superstar" companies. As these companies become more powerful and the market more concentrated, the success of startups and the innovation they bring declines. This paper written by David Autor describes the additional issue of these companies taking a disproportionate share of national profits, while employing relatively few people. This in turn leads to a decline in labor's share of GDP, as these big companies grow bigger and occupy a greater part of the economy, effectively stagnating median wages.

Amid the concerns that have been risen, the trend of increasing M&As shows that regulators have little interest in stepping in on the M&A rush in tech. According to section 7 of the Clayton Act, mergers and acquisitions are prohibited if the effect “may be substantially to lessen competition, or to tend to create a monopoly.” The FTC has historically interpreted this phrase to side with the interests of firms by addressing the questions: does a merger give the combined company the power to raise consumer prices, and are barriers to entry so high that new players can’t easily jump in? The issue with this approach is that it fails to address companies such as Facebook and Google, which provide a free service and therefore cannot effectively "raise consumer prices."

The tech giants often argue that they compete heavily with one another, and that their dominance is temporary because barriers of entry are relatively low. While this may be true, any new innovation that attempts to enter the market is quickly either bought out by the giants or replicated. A great example of this can be seen in Snapchat's past five years. Snapchat hit the app stores in late 2012, and within a year it posed such a threat to Facebook that the tech giant offered $3 billion to acquire it. When Snapchat declined, Facebook proceeded to clone Snapchat's innovations, adding the Stories feature to its Instagram, WhatsApp, Messenger services, and to the regular Facebook product. Thus Facebook took Snapchat's innovative ideas to their much larger audience, and Instagram stories have since surpassed Snapchat's in popularity.

This problem of increasing consolidation in tech must at some point be more heavily addressed by the FTC. We need only look back to the 1980s to see how a similar fate played out for the media and entertainment industries. In 1983, late journalist Ben Bagdikian published The Media Monopoly, a book which shed warning to the fact that just 50 corporations created and distributed the vast majority of the news and entertainment content in the United States. At the time, the FTC barely blinked an eye at Bagdikian's concern. By 1992 that number had dropped by half. By 2000, six corporations had ownership of most media, and today just five dominate the industry, according to the latest tally.

If regulators don't change or tighten their interpretation of antitrust laws, the tech industry may be facing a similar fate. One way to look at it could be in terms of privacy, rather than competition and pricing. For example, because Facebook dominates the vast majority of social media, users are essentially forced to accept the privacy agreements else be blocked out of nearly all social media. Similar issues can be raised of the monopoly control that Facebook and Google hold over customer data.

Though not every M&A deal is bad, it's important that regulators intervene when necessary in order to prevent excessive consolidation of the tech industry. Startups are an important part of the industry as they provide more innovation and disruption to the market, and ultimately bring about more new ideas and competition.

Topics: startup, startup industry, tech giants, tech startups, acquisition, facebook, FTC, Google, Latest Post, M&A, merger


Written by Sterling

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