04/04/2016
One version of an ancient Greek proverb says, “Nothing is constant but change.” From the perspective of tech firms, this can be interpreted as being akin to a greasy pole that is particularly greasy at the top. Sustaining oneself at the top is difficult and market leadership often proves to be transient, which is why market shares or usage share shift suddenly and rapidly. In this article, I summarize some of the stories that highlight such fall from grace, analyse why such changes happen in the tech world, and discuss how public policy pertaining to these issues needs to evolve.
Passing the parcel among social networking websites: From Friendster to Facebook and other examples
The transience of market leadership becomes particularly striking when one looks at the rate at which leadership positions change within the social networking space. One of the early entrants in the social networking space was Friendster in 2002, which skyrocketed in popularity by registering over three million subscribers within a few months. However, approximately two years after its launch, traffic on Friendster started to decline. Top management exited, but the new management could do precious little to stem the exodus of subscribers. Market commentators have observed that Friendster’s engineering was unable to keep up with burgeoning demand, thereby diverting the traffic to other websites such as Myspace.
The story of Myspace losing market leadership is similar. Launched in 2003, Myspace was attracting close to a million unique visitors every month by 2004, and its subscriber base became one million by August 2006. Orkut, another social networking website launched by Google, was gaining significant ground, especially in India and Brazil. However, in 2008, Myspace started to lose its customer base to Facebook, and Orkut followed suit in 2010. Analysts attributed Facebook’s triumph over these websites to innovation. Facebook was available in several languages (Hindi, Bengali, Tamil, Telugu, Punjabi and Malayalam in India, for example) and offered customizable privacy features that provide better security.
This phenomenon of losing market leadership is not restricted to social networking alone. Among Internet companies, Digg lost market to Reddit in the tagged news market. Google Buzz, an instant messaging service that was launched in February 2010, registered more than nine million posts in two days of launch. However, Google had to shut it down by 2011 because of competition from Twitter. Similarly, Google Latitude, a location sharing application, was launched in 2009. At its peak, it operated in 27 countries, with more than 10 million users on a monthly basis. Thanks to competition from Foursquare, Latitude was shut down by 2013, despite a strong initial performance. These examples prove that market leadership is, after all, just one innovation away from being replaced at the ‘greasy’ top.
Policy implications
An important question is, why does this happen? The reality of the tech space is that users have immense power to switch. To attract traffic onto a platform (for example, Facebook), its owner needs to continuously innovate. At the same time, if users find an alternative service more beneficial, as the above examples show, they immediately switch. Moreover, since this market is still evolving, there are gaps—for instance, flexibility in privacy settings, better features, etc.—which can be exploited by another innovator. Given this, one can only say that since there is so much investment in this sector (and this is especially true in India), there are always new innovations round the corner. In a sense, first-mover advantage in this space is more difficult to sustain than in industries that are not so innovation-driven.
Any policy paradigm that analyses competition—for example, competition and antitrust—needs to recognize this transient nature of the market. While it is tempting to look at the user base and conclude that there is market power, a more relevant question at this juncture is, can this market power be exploited in such a way that the consumer is indeed harmed? Given the number of fence-sitters (innovators), the scope for such harm is indeed limited. Another question that needs to be addressed in order to assess competition is the definition of relevant market. Since these platforms are multi-sided—markets that connect advertisers with users—traditional market definitions may not be applicable. The idea of what constitutes a relevant market is still evolving, with no definite consensus as of now.
A major survival strategy in any industry characterized by fast-paced innovation is product differentiation. As already discussed, a tech firm cannot really rest on its laurels and needs to constantly innovate in order to survive. Moreover, firms have an incentive to strategically innovate in order to differentiate themselves from competitors by concentrating on completely different sets of features or on different markets. To illustrate, Facebook and Twitter look at the same consumer group; yet, they offer different kinds of interface to subscribers. Further, while Facebook taps personal friendship networks, LinkedIn looks at professional networks.
Therefore, from a policy angle, one needs to carefully differentiate between the strategies aimed at product differentiation vis-à-vis precluding competition. Internet search engines such as Google and Bing provide search results by integrating other features such as maps, calculators, etc. into their search results in order to differentiate themselves while making search more user-friendly. In this context, policy measures that nix such innovation attempts may be counterproductive from a consumer welfare standpoint.
In conclusion, it is important to note that we are in the middle of a digital revolution, where there are low or no switching costs, innovation reigns supreme, rewards for winning are huge, and it is difficult to remain at the top. Competition, strategies and regulation are all still evolving in this space. In the meantime, the moral of the story seems to be: high-tech market leaders, innovate to survive.
Viswanath Pingali is a faculty member in the economics area, and his research interests include experimental economics, modelling competition and government regulations.
