Since the turn of the millennium, the love for new technology, which allows for massive innovation and enables rapid growth, was born. Back then, love for these new exciting tech companies and new technologies (like the internet!) was mostly the result of the rise of the stock prices of related companies: the Nasdaq had risen five-fold between 1995 and 2000, before it tumbled from a peak of 5,048.62 on March 10, 2000, to 1,139.90 on Oct 4, 2002, which equals a 76.81% fall (Investopedia, 2019). This massive decline in valuation is now better known as the “dot-com bubble.”
It would take 15 years for the Nasdaq to regain its dot-com peak, which it did on April 23, 2015. Along the way, one pattern became clearly visible: the rise of the winner-takes-all economy. New tech-markets are often intensely competitive, amplified by the volatile nature of the technology themselves. However, once a tech company achieves clear market leadership, it soon attains complete dominance and then is almost impossible to displace (Barwise, 2018).
As a result, this market dominance enables rapid growth and outsize profit margins. Those huge profits and growth potential attract cheap capital and render the rest of the sector flaccid. Firms from the “old-economy” have no chance of competing. Venture capitalists and private equity investors are able to receive a 20x ROI by investing in one great idea, while the majority of people (average and below-average) have to do much more to save for retirement if saving at all. It’s become clear that the invisible hand has been screwing the “fair” distribution of wealth. An example of this is that rent, home prices, and college tuition have all increased way faster than incomes in the US over the last 50 years, according to a research conducted by Student Loan Hero (Barwise, 2018). You might think, will this pattern eventually reverse and become fair again? It, most likely, won’t.
Direct- and indirect network effects, big data, machine learning, switching costs, and lock-in effects among other things will increasingly drive tech companies’ market dominance. These companies are able to operate on increasingly lower margins than their competitors and, thereby, destroying competition. Their massive size and unchecked power throttle competitive markets and keep the economy from doing its job — namely, to promote a vibrant middle class (Galloway, 2017). The global economy is consciously shifting from producing millions of millionaires to producing one trillionaire. Hence, today, it’s never been easier to be a billionaire, or harder to be a millionaire. Alexa, is this a good thing?
References:
Galloway, S. (2017). The four. New York: Portfolio.
Barwise, P. (2018, 7 October). Nine reasons why tech markets are winner-take-all. Accessed at 2 October 2019, at https://www.london.edu/lbsr/nine-reasons-why-tech-markets-are-winner-take-all
Hayes, A. (2019, 25 June). What Ever Happened to the Dotcom Bubble? Accessed at 2 October 2019, at https://www.investopedia.com/terms/d/dotcom-bubble.asp
