The New Goliaths: How Corporations Use Software to Dominate Industries, Kill Innovation, and Undermine Regulation

by James Bessen

An approach to reinvigorating economic competition that doesn’t break up corporate giants, but compels them to share their technology, data, and knowledge
 
“Bessen is a master of unpacking the nuances of a complex array of interrelated trends to build a coherent story of how the promise of the democratized Internet ended up under the control of just a few. Read The New Goliaths to see how the forest came to have only room for a few tall trees with the rest of us in the undergrowth.”—Joshua Gans, coauthor of Prediction The Simple Economics of Artificial Intelligence
 
Historically, competition has powered progress under capitalism. Companies with productive new products rise to the top, but sooner or later, competitors come along with better innovations and disrupt the threat of monopoly. Dominant firms like Walmart, Amazon, and Google argue that this process of “creative destruction” prevents them from becoming too powerful or entrenched.
 
But the threat of competition has sharply decreased over the past twenty years, and today’s corporate giants have come to power by using proprietary information technologies to create a tilted playing field. This development has increased economic inequality and social division, slowed innovation, and allowed dominant firms to evade government regulation. In the face of increasing calls to break up the largest companies, James Bessen argues that a better way to restore competitive balance and dynamism is to encourage or compel these companies to share technology, data, and knowledge.

Genres: Business, Nonfiction, Technology

272 pages, Hardcover

Published June 7, 2022

About the author

James Bessen, an economist and technologist, serves as Executive Director of the Technology & Policy Research Initiative at Boston University. He has also been a successful innovator and CEO of a software company. Bessen studies the major economic impacts of technology on society (see New York Times profile), writing academic papers, magazine articles, and books. His latest book, The New Goliaths (Yale 2022), argues that major firms’ investments in proprietary software systems have allowed them to increase their dominance of industries, slowing aggregate innovation and raising income inequality. Earlier work with Michael Meurer on patents identified the social costs of poorly defined property rights (see Patent Failure, Princeton 2008), including the first evidence of damage from patent trolls. Bessen’s work on automation (see Learning by Doing, Yale 2015), both historical and current, provides a distinct analysis of effects on employment, skills, and wage inequality. Bessen’s work has been widely cited in the press as well as by the US White House and Supreme Court, the European Parliament, and the Federal Trade Commission.

Reviews

[Sanford Chee · Rating 2 out of 5]

An idea that could be encapsulated in an article rather than a dry book. Read instead Michael J. Mauboussin, 'Increasing Returns'
https://www.morganstanley.com/im/publ...
FT interview: Michael Mauboussin on increasing returns to scale 23 Feb 2024
https://www.ft.com/content/44a084b6-2...
Michael J. Mauboussin on investing in intangibles
https://acquirersmultiple.com/2020/11...
https://www.morganstanley.com/im/publ...
https://www.morganstanley.com/im/publ...
https://youtu.be/iwx0HGp6ie0?si=LxEqG...
https://www.morganstanley.com/im/en-s...
Intangible assets are more scalable than tangible assets. That means successful companies that rely on intangible assets can grow faster than companies built on tangible assets. As the overall mix of investments shifts from tangible to intangible, we should expect to see faster growth rates for the winners than we have seen in the base rate data.
https://www.morganstanley.com/im/en-s...

New Goliaths mentioned: ($WMT but $COST has been the better operator), $MSFT, $APPL, Toyota vs $TSLA, $AMZN, $GOOGL, $META, $NFLX

The Magnificent 7: $NVDA, $META, $TSLA, $AMZN,$MSFT, $GOOGL, $APPL
The Seven Samurai: How Big Tech Rescued the Market in 2023! -Damodaran
https://aswathdamodaran.blogspot.com/...

Not mentioned, but if software eats the world, then Constellation Software $CSU would be a beneficiary.

1. Idea: Goliaths invest in intangibles (proprietary software) that are excludable but non-rivalry in consumption eg $GOOGL & $META developed systems to use data fr online activity to tgt consumers w/ advertising.
Software revisits the tradeoff between efficiency and heterogeneity, allowing firms to achieve a degree of both.
Marc Andreessen, 'Why Software Is Eating the World', Aug 2011
https://a16z.com/why-software-is-eati...
New technology is creating a new economy, a superstar capitalism.

2. Disruption Lost
Ironically, after the publication of Clay Christensen, 'The Innovator's Dilemma' in 1997, the rate of disruption of leading companies has sharply declined over the past two decades. P(top 4 firm by revenue in a given industry will be displaced in next 4-yrs) peaked 20+% in 1990s and declined to ~10% by 2020
Why did disruption of industry leaders decline after 1997? Nature of competition has changed as new generation of software enabled biz models allow dominant firms to compete in a different way. Competing on complexity, not just costs: greater selection, >features (feature wars), customised offerings, >targeted customer segments etc.
Firms have become dominant by making major investments in proprietary software =>capex in PPE may be less sig. than investment in intangibles/R&D.

3. Superstar Economy
Competing on complexity changes the nature of markets and industry structure. Complexity in products and services allows firms to differentiate their offerings from those of rivals.
The dominance of the top firms is not just a matter that they have better managers or higher-quality workers. It’s also that the nature of competition has changed in many industries, magnifying performance differences and changing firm behavior. Competing on low cost (economies of scale) & differentiation (complexity): since 1997, firms make large investments in systems that combine the advantages of large scale with the advantages of mass customization.
Building blocks enablers: PC revolution, Moore's Law, internet revolution, broadband, cloud etc
When firms differentiate on quality, the growth of the market does not necessarily erode firm dominance especially for industries that invest significantly in advertising and/or R&D. The critical distinction here is that in these markets, fixed investments in advertising and R&D allow firms to differentiate on quality.
https://interbrand.com/best-global-br...

4. Open vs Closed Capitalism
In the past, knowledge of major new technologies spread to rival firms, increasing competition. New knowledge was shared, it was licensed, it was copied, and it was independently developed. That appears to be happening to a lesser extent or more slowly today. Why? (1) dominant firms don’t have incentives to license their technology because doing so would reduce their differentiation from rivals; and (2) the complexity of the technology limits how easily rival firms can imitate or develop independently.

5. Automation Paradox
When machines start doing the work of people, the need for people often (but not always) increases eg ATMs, bar code scanners =>depends on consumer dd & how elastic it is.

6. Productivity Gap
Slower diffusion is changing industry dynamism, the growth prospects of startup firms, productivity growth.

7. Divided Society
Superstar firms pay more, especially in some cities and some occupations. Because pay increasingly depends on whom you work for and not just how hard you work, inequality fuels a politics of resentment. As economic divisions and inequality grow, social cohesion is undermined =>it pays to work at the new goliaths

8. Regulating Complexity
Regulatory capture less obvious when there's complexity: balance of power between large corporations and the rest of society has shifted, as it did in the past. When technology makes products and services dramatically more complex, government loses its ability to regulate.
Compliance costs has a fixed component so new Goliaths enjoy scale benefits.

9. Platforms & Antitrust
What happened post Jul 2020 House Judiciary Antitrust Subcommittee hearing? Tougher M&A reviews for Big Tech
https://youtu.be/XxyyZTETd0k?si=cWxVW...
Platforms = modular base components of a technology that are used (combined with) multiple higher-level components or applications.
Scale economies shared =>moat + flywheel
Long list of supposedly untouchable dominant firms in network markets that were displaced, including Yahoo! in search, MySpace in social media, and Nokia in mobile phones. While leading firms are frequently disrupted in emerging markets generally, these examples show that network effects do not guarantee continued dominance.

10. The Next Unbundling
Regulation to promote open standards, unbundling.

11. New Info Economy

'Why America’s tech giants have got bigger and stronger' -The Economist Aug 2024
https://www.economist.com/business/20...

[Edwin Goh Wei Qian · Rating 4 out of 5]

As someone interested in finding the solutions to empowering workers in the world of rapid digitalisation, this book helps me understand the impacts of technology on industries and the workforce, specifically the role of big corporations. The line "the policy challenge is to preserve the benefits while reinvigorating the competition, increasing diffusion of technology, and restoring the balance of regulation" captures the real adversity posed by technologies on policymakers succinctly. It offers a way for me to rethink platform regulations and employment benefits in my country where a few superstar corporations dominate the economic developments.

Whether you are a policy wonk like me or a layperson, I'd like to invite you to check out this book to learn about the changing role of technology companies and its implication for innovation, the economy and the workforce.

[Rachel Childers · Rating 4 out of 5]

This book provides a theory of corporate concentration and declining dynamism over the past to decades as driven by firm-specific technology investments, which promote product differentiation, create disincentives for entry of competitors, and slow down diffusion of innovations, leaving a growing gap between superstar firms and all others. This thesis is related to but distinct from recent work in macroeconomics and law which traces the rise in concentration and decline in entry to changes in market power due to declining antitrust enforcement. Here the proposed explanation is partly technological, as software is complex and narrowly tailored to an environment and applications and so firm investments can promote the efficiency and quality of output of a single large firm with the capacity to develop it without providing large technological spillovers to other firms like earlier technologies that were more easily duplicated and so promoted competition and aggregate growth. But it doesn't leave corporate conduct off the hook, as this non-transferable style of investment is partly a choice driven by desire to entrench a dominant position

In terms of structure, the book lays out the theory and evidence for this view based on broad facts about market structure as well as micro-level evidence and case studies on the role of corporate software systems, including big tech but also retail, automotive, and other sectors. Then it describes consequences, including declining growth, rising inequality, and greater difficulty of enforcing regulations, and it ends with policy suggestions, focusing on remedies based on technology sharing, open standards, and patent and copyright reform.

The argument is supported by very extensive overview of recent empirical work in industrial organization, for which this book serves as an excellent literature review (and sometimes delves too deep, covering areas with somewhat less direct relevance to the main argument). The main logic however seems to follow models in the "patent race" class, where firms in an industry compete on price and horizontal and vertical aspects of product fit, and can make investments to improve their absolute and relative positions, and qualitative aspects of market structure inform the view that observed trends are consistent with a declining diffusion parameter, as opposed to other possibilities like changes in returns to scale or factor-neutral productivity. Evidence that these trends are fully driven by software, as opposed to other aspects of technological, organizational, or legal structure is a little less comprehensive though it certainly seems to play some role. I would have to go to the cited literature to get a better sense of which parts of the argument are following directly from a model, and which are merely being interpreted with such a model in mind. Certainly the policy suggestions seem to follow from the idea that regulators have some leverage over something like a "technology diffusion" parameter. If they did, the suggestions would follow from the analysis, but I would wait on empirical research on the efficacy of such remedies (and of others that he dismisses) before putting it into practice. That said, a weaker "policy remedies" chapter at the end of a book is par for the course, and the body was an informative and comprehensive overview that taught me a lot about modern industrial organization.

[Will Smith · Rating 4 out of 5]

Read this to better understand the structural bear thesis against small caps. An interesting thesis that the rise of proprietary software is the driver of increasing dominance from larger firms. Perhaps the explains the historically high proportion of non earners in many small cap indices? My notes from the book…

The chance of a top firm being displaced by a rival is less than half of what it was in the 1990s after increasing in the 1970s and 1980s. This coincided with a sharp rise in software investment at large companies

The market share of the top 4 firms in an industry correlates with the % of the workforce in that industry that are dedicated to software development

Studies suggest automation is neutral to job creation but negatively impacts some workers by increasing switching costs as they no longer have the skills to do the new work. Therefore the key issue isn’t mass unemployment but job transitions. Job destruction from economic changes is 4x the impact than automation

Proprietary software is more complex which makes it harder to regulate. Firms are able to cheat easier which further entrenches incumbent advantages

Larger companies are unbundling software less. This creates less diffusion of innovation thru SMBs. He argues companies should unbundle as there are benefits to doing so (IBM in software, AWS for Amazon) but if they choose not to regulators should compel them.

[James Yoon · Rating 5 out of 5]

Excellent analysis of the impact of complexity and proprietary software on competition, innovation and inequality. The focus on defusing technology and open platforms as a means of increasing productivity, competition and the pace of innovation is informative and important. The book destroys many myths about competition and provides a valuable guide for policy moving forward.