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Posted: July 29, 2011

Reinventing monopolies: Part 1

They all have a beginning, a middle and an end

Thomas Frey

In 1936, Edwin Howard Armstrong unveiled an improvement in radio that would later become known as FM radio. Working out of an office on the 82nd floor of the Empire State Building, an office provided by RCA, Armstrong was on the verge of revolutionizing the radio industry. But it was a revolution that would not happen for several decades.

Armstrong was a true innovator in communications technology, first patenting three breakthrough technologies between 1914 and 1922. By early 1923, Armstrong was a millionaire as a result of licensing his patents to RCA.

David Sarnoff, then President of RCA and former friend of Armstrong, decided the switch from AM to FM would undermine the current AM monopoly. Sarnoff came to see FM as a threat and refused to support it further. What once seemed like a sure thing quickly turned into an industry black sheep.
After countless years of court battles with RCA and others, financially drained, Armstrong gave up the battle. Removing the air conditioner from the window of his 13th floor apartment in New York City, he jumped to his death on Jan. 31, 1954.

Due to the actions of RCA, FM technology sat on the sidelines for two decades waiting for legal battles to play out. It wasn't until 1952 that Blaupunkt would become the first radio manufacturer to offer FM receivers for cars, and it wasn't until 1978 that listenership to FM stations would finally exceed that of AM stations in North America.

The story of FM radio typifies what we've all come to think of as the overarching ruthless power of monopolies. But what a monopoly is and how it gets formed is being reinvented by some very shrewd business people using tools that didn't exist 20 years ago.

The Human Nature of Monopolies

In economic terms, a monopoly exists when a single entity has enough control over an industry to determine the terms of access for products or services.

In a free enterprise system, the game of business is a competitive sport that rewards aggressive personalities. As a result, some monopolies form naturally out of the competitive nature of generally accepted business practices such as with Google's search engine, Microsoft's Office products, or Facebook's social networking system.

One thing they all have in common is an "unusual competitive advantage" stemming from economic barriers such as economies of scale, capital requirements, cost advantages, and technological superiority. However they can also be formed around legal barriers and deliberate actions.

In the recently released book "The Master Switch: The Rise and Fall of Information Empires" written by Columbia Law Professor Tim Wu, Tim does a masterful job of describing the history of communications in the U.S. starting with the telegraph and the growing power of Western Union.

As Dr. Wu describes, nearly every new form of communication technology begins with a period of experimentation followed by overly optimistic speculation on the freedom and openness it will bring to the masses But over time, one dominant player will emerge to usurp control of the industry, and turn it into a monopoly.

The Life Cycle of a Monopoly

One thing history has taught us is that all monopolies end. Given the fact that they end, we can begin to distinguish the characteristics of the beginning, middle, and end as well as the turning points along the way.

Government sanctioned monopolies granted to the likes of power, natural gas, and cable TV companies requiring their own infrastructure tend to have much longer cycles. Natural-forming monopolies in rapidly changing tech spaces, like the short-lived dominance of MySpace in social networking circles, can be measured in months, not years.

As Professor Wu says, "Info-monopolies tend to be good-to-great in the short term and bad-to-terrible in the long term. Today, a single search engine has made virtually everyone's life simpler and easier, just as a single phone network did 100 years ago. Monopolies also generate enormous profits that can be reinvested into expansion, research and even public projects: AT&T wired America and invented the transistor; Google is scanning the world's libraries. The downside shows up later, as the monopolist ages and the will to innovate is replaced by mere will to power."
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Thomas Frey is the executive director and senior futurist at the DaVinci Institute and currently Google’s top-rated futurist speaker.  At the Institute, he has developed original research studies, enabling him to speak on unusual topics, translating trends into unique opportunities. Tom continually pushes the envelope of understanding, creating fascinating images of the world to come.  His talks on futurist topics have captivated people ranging from high level of government officials to executives in Fortune 500 companies including NASA, IBM, AT&T, Hewlett-Packard, Unilever, GE, Blackmont Capital, Lucent Technologies, First Data, Boeing, Ford Motor Company, Qwest, Allied Signal, Hunter Douglas, Direct TV, Capital One, National Association of Federal Credit Unions, STAMATS, Bell Canada, American Chemical Society, Times of India, Leaders in Dubai, and many more. Before launching the DaVinci Institute, Tom spent 15 years at IBM as an engineer and designer where he received over 270 awards, more than any other IBM engineer.

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