The alternate title for this post was “Why things suck.”
I’ve been analyzing corporate behavior for 25 years. I’ve covered Microsoft, Comcast, Facebook, sports leagues, and government. And one simple statement — monopolies prioritize strategy over customers — explains so much.
Monopolies are not evil. It’s not that they don’t care. It’s just that once the competitive penalties for mistreating or overcharging customers are gone, what’s left is strategy. And rule number one of monopoly strategy is to do whatever is necessary to maintain the monopoly.
In an ordinary business, the only source of revenue is customers, and customers have choices. As my former colleagues Harley Manning and Kerry Bodine have demonstrated, companies that excel at customer experience generate growth and profit; those that don’t lose market share. Fred Reichheld’s analysis of Net Promoter Scores shows something similar. As a consumer, you know this: if there’s something better or cheaper, you switch.
But what happens if there is not a choice?
Then companies prioritize strategy. What does that mean? It means that their primary goals are these:
- Preserve the monopoly.
- Fend off disruption.
- Expand into other spaces, especially globally.
- Cut costs and exploit suppliers.
- Prevent regulation, unless it helps fend off competitors
- Pay lip service to improving the lot of customers and others
None of these goals are good for customers. Most of them result in higher prices, reduced quality, and deteriorating service. In other words, things suck and you have no choice about it.
A few words about “customers”
Classically speaking, a company’s customer is whoever pays them. For example, the customer of Facebook is the advertiser, and the customer of a publisher is the bookstore.
But for the purposes of this post, I will be speaking more broadly about the classes of people that monopolies serve poorly. In addition to traditionally defined customers, I’ll also look at how they treat “users” (for example, people on Facebook), employees, and even suppliers. While these are not customers, they’re also not strategically important, because with a monopoly they have no choices.
I don’t just call them stakeholders because there is another group of stakeholders that monopolies serve just fine: investors. There is always competition for the investor’s money. So monopolies maximize what investors want, which is profit.
How monopolies work
If you are running a monopoly, you are in great shape. It probably cost a lot to create that monopoly, but now that you have built it, you no longer need to worry about customers switching. You can cut your investments in expensive things like product development, service, and hiring the best people and paying them to stick around. You can increase prices to the maximum amount that people can pay, since the only danger is that they will quit altogether.
So you focus on the strategy goals. Let’s go through them one by one.
Preserving your monopoly
Remember, monopoly rule number one is to do whatever is necessary to preserve the monopoly.
Once a monopoly ceases to be a monopoly, profits drop due to competition. So monopolies take constant action to maintain their position.
This is why, for example, Facebook does everything possible to maximize its addictive qualities and network effects. People who leave Facebook come back because they miss it, and because everyone else is there. This is also why LinkedIn now tells you when you have a message from someone, but makes you go to their site or app to see what it is. So long as you cannot substitute another service for these social networks, they can do what they want, because their monopoly is not at risk.
When cable TV was a monopoly, cable companies would lavishly serve its “licensing authorities” — the local decision makers in each town — to ensure that they continued to have the sole license to deliver TV services in each locality. That worked great until telcos came around.
In the U.S. Federal government at this moment, Republicans have a solid monopoly in the Senate. Unlike the House, the Senate elections for any given seat take place only once every six years, and the many low-population rural states are unlikely to elect Democrats. This explains the behavior of Republican Majority Leader Mitch McConnell, who puts up with all manner of irrational behavior from the president of his own party because it allows him to accomplish Republican goals like approving conservative judges and slowing government regulation. It is also why McConnell is so firm in his opposition to changes in voting laws that might make it easier to dislodge that monopoly.
This trend is even clearer in the case of authoritarian governments like Russia, Venezuela, and Turkey, where rulers act to preserve their power above all other priorities.
Preserving the monopoly is the primary strategic goal of every monopoly, ahead, even, of generating short-term profit. Preserving monopoly leads to long-term power over users and customers, which leads to more profits over the long run. Predatory pricing intended to drive potential competitors out of business is an example of taking short-term profit hits to preserve the monopoly.
Fending off disruption
Disruption is the monopoly’s main enemy, since it is the most likely way that a monopoly will end.
Disruption from the Internet and mobile devices disrupted Microsoft’s monopoly on applications and operating systems, for example, as it made it possible for people to do work on devices not running Windows and Microsoft Office.
Disruption from Netflix is threatening cable monopolies as people cut the cord.
Facebook’s investments in virtual reality are hedges against the day when people may prefer to interact on VR and AR headsets rather than on mobile phones.
As Clayton Christensen described in The Innovator’s Dilemma, there are many internal behavioral barriers that prevent companies from facing up squarely to disruption. This is why monopolies are more likely to invest in or acquire disruptors rather than incubate innovations that disrupt their own monopoly positions. Remember, maintaining the monopoly is rule one — why would you disrupt it yourself?
A monopoly inevitably faces profit pressure. It cannot gain any more customers; it already has them all. It cannot raise prices any more; it already has them pegged at maximum value that the market will bear. So where is the growth?
Growth comes from two areas.
One is selling the captive customers something else. This is why Amazon didn’t stop with selling books, and why cable companies started offering broadband along with television services. It is why the NBA started its women’s basketball league, the WNBA. Once you have dominated a category, you may as well see what else you can sell to those captive customers.
The second area of growth is international expansion. This is why Amazon is in the UK and Japan and Facebook is everywhere but China. Once you have the habit of domination, bringing your model in to dominate a new market seems natural. Of course, competitors and laws are different in new international markets, but investing in establishing monopolies in new parts of the globe is one of the few dependable sources of growth for monopolies.
Sometimes a company’s monopoly model has been implemented by a different company in other geographies. This makes international expansion difficult, because there are no economies in paying top dollar to acquire another monopoly, and attempting to dislodge one is virtually impossible. This is why Comcast has not bought many cable companies outside the US.
Cutting costs and exploiting suppliers and workers
If you can’t increase profit by expanding, you can increase it by cutting costs. All businesses try to cut costs, of course, but monopolies are different. They don’t have to worry about how cutting costs might decrease quality, because their customers have to buy in any case.
This is why cable TV service has historically sucked. The investment necessary to improve service is large, but if the cable companies were to make that investment, they’d reap no benefit in increased customer loyalty. When telecoms began to compete with cable companies, there was a feint in the direction of increasing cable service quality, but once it became clear that the phone companies’ service was just as bad as the cable companies’, the urgency for this shift decreased.
In some cases as a consumer you may not see the service problems, but they are there. At Facebook, for example, advertisers complain frequently about the poor level of its mostly automated service, and there is little protection against fraudulent advertisers. Amazon exploits its warehouse and professional workers mercilessly and mistreats suppliers, often creating its own knockoffs of their most successful products. Wal-Mart drives supplier prices down to a point that all but eliminates supplier margins.
Sports leagues are monopolies, too. Before player unions, they paid players peanuts. Even now, NFL players bash each others’ brains out and the league doesn’t have the will to fix it. Leagues and teams hold up municipalities for incredibly profitable stadium deals, threatening to take their unique and irreplaceable product elsewhere.
If any negotiation with a monopoly, you lose. If you need the monopoly to get access to its locked-in customers, good luck. Unless you’re the government.
Avoid regulation unless it preserves the monopoly
Government is supposed to regulate monopolies. The reason is all of the above behaviors — monopolies are naturally exploitive, and regulators are supposed to protect customers, especially from out-of-control prices.
This is why when there are rumblings about regulating the behavior of tech giants, the tech giants will do anything to avoid this, including promises of self-regulation that are of questionable enforceability.
The government regulators can always threaten to sue or fine the monopoly or even break it up. In extreme cases this happens, but usually, the monopoly does whatever is minimally necessary to make the threat go away. Once again, rule number one is to do what is necessary to maintain the monopoly.
Ironically, some monopolies embrace regulation. Regulation is inevitable in the telecom, utility, and pharmaceutical spheres, for example. Companies of this kind have already built up regulatory and compliance staffs to deal with and manipulate the regulations. They know that any upstart entrant must deal with the same regulations and the costs that go along with them, which makes disruption difficult. Once again, maintaining the monopoly, even at the cost of regulation, is rule number one.
Of course, the one unavoidable monopoly is the government. If you don’t like the service level at the IRS, you still have to pay taxes there. If you don’t like the department of motor vehicles, you still have to get your driver’s license there. Government monopolies suffer from all the problems of any other monopoly, but since they regulate themselves, they can often deliver poor customer service. Just ask any veteran dealing with the Veterans’ Administration.
Pay lip service to serving customers and others
Monopolies behave badly. Journalists and legislatures then call the to account.
This is when you get to see monopoly CEOs testify in front of Congress or state legislatures or EU regulatory bodies. Monopoly executives are never defiant. They are always contrite. But they understand their business far better than legislators do. As a result, their contrite body language does not stop them from finding whatever clever ways are necessary to evade responsibility and avoid any action that would result in real change.
Things sometimes get better for a little while. This causes the lawmakers and regulators to back off until things slide back to their more typical low-quality, high-priced degree of customer and user experience.
What to do
More antitrust enforcement would make a difference. So would more regulation. But in the end, monopolies are monopolies and will continue to deliver bad service.
Governments should embrace rules that enable upstart disruptors to challenge monopolies. This is how Tesla was able to twist state authorities into relaxing the rules requiring car companies to sell through independently owned dealerships.
But remain aware that today’s upstart hopes to be tomorrow’s monopoly. That is where the profit is. And once an upstart becomes a monopoly, it will begin acting from the same playbook as all the other monopolies.