(The topic has also come up in speeches by FTC Commissioners [and a paper], in discussions surrounding the EU’s forthcoming Digital Single Market strategy, and is the frequent topic of recent academic writing.) Specifically, the concept being debated is whether the accumulation of data by Internet companies hinders competition because the new entrants will not be able to compete effectively with the first mover in the marketplace.
In this post, I will address why startups and entrepreneurs should not be overly concerned.
In a stylized view of the Internet economy, as a platform (such as Google, Facebook, Amazon, Pinterest or Twitter) achieves scale and gains users, it acquires more data.
However plausible this argument sounds, a review of the short history of the Internet economy, which has been characterized by intense competition and frequent disruption, seems to cast doubt on the soundness of the theory.
(See Andres Lerner’s discussion of the User Scale – Service Quality feedback loop.) Besides the common examples of Facebook overtaking Myspace and Google overtaking prior search competitors (who, at the time, were predicted to be unassailable largely on account of the User Scale – Service Quality feedback loop discussed above), a casual look at online markets illustrates how competitive the market is.