Silicon Insider: The Nonexistent Tech Monopoly

Feb. 22, 2007 — -- Question: When is a merger a monopoly?

Answer: When the government says it is.

You may have thought the answer was "when the consumer suffers." But that wouldn't be correct, especially in high tech. And that lesson is about to be learned by XM and Sirius satellite radio in the weeks ahead as the government probes their proposed $13 billion merger.

The XM/Sirius merger will, detractors say, create a monolithic company that will essentially own 100 percent of the satellite radio industry. Yeah, and so what?

The FCC and the Justice Department may very well rule the proposed merger a monopoly. But it probably shouldn't. Even with 100 percent control of satellite radio, the combined company would face numerous forms of competition, ensuring that consumers have enough choice to keep the new company honest.

If the history of the tech industry has told us anything, it's that monopolies, whether real or perceived, are usually only temporary and rarely do much to hinder either innovation or consumer choice.

There are a number of traditional definitions of a monopoly. I remember being taught them in business school. The standard scenario is when a company enjoys such sufficient market domination that it can set prices that do not accurately reflect the balance of supply and demand in the market.

As the narrative goes, the monopolistic company first cuts prices drastically, relying upon its sheer size and cash reserves to survive long enough to drive its competitors out of the business. Then, once the competitive landscape is clear, the company boosts prices and enjoys obscene profits from that point forward.

Needless to say, there are an endless number of variations on this theme of control and profitability. For example, the major companies in a market can secretly collude to "fix" prices so they all enjoy profits they could never achieve under the regime of real competition.

Or, a company can patent a new invention or idea, refuse to license it to anyone else and then not only own the new market it creates, but also "bundle" other products to that invention -- that is, require users to buy those other products if they wish to get the invention itself.

Or, a company that sells millions of a single device, one that gives an important time-competitive advantage to its customers, may say to its biggest customers: "If you buy even one unit of a similar device from one of our competitors we will drop you from No. 12 on our delivery list (in two weeks) to No. 20,000 (i.e., next year), and you will fall behind your own competitors."

Or -- and this one is more subtle -- you identify the top design talents at your chief competitor, and steal them away. You then steal your competitor's products by duplicating them, within the bounds of legality. And, if that fails, you've still wounded your competitor by stealing its best designers and adding them to your own team.