The Nature of the Marketplace

Inexpensive knowledge destroys economies-of-scale. Customized knowledge
permits “just in time” production for an ever rising number of goods.
Technological progress creates new means of serving old markets, turning
one-time monopolies into competitive battlegrounds.

These phenomena are altering the nature of the marketplace, not just for
information technology but for all goods and materials, shipping and
services.

In cyberspace itself, market after market is being transformed by
technological progress from a “natural monopoly” to one in which
competition is the rule. Three recent examples:

1. The market for “mail” has been made competitive by the development of
fax machines and overnight delivery–even though the “private express
statutes” that technically grant the U.S. Postal Service a monopoly over
mail delivery remain in place.

2. During the past 20 years, the market for television has been
transformed from one in which there were at most a few broadcast TV
stations to one in which consumers can choose among broadcast, cable and
satellite services.

3. The market for local telephone services, until recently a monopoly
based on twisted-pair copper cables, is rapidly being made competitive by
the advent of wireless service and the entry of cable television into
voice communication. In England, Mexico, New Zealand and a host of
developing countries, government restrictions preventing such competition
have already been removed and consumers actually have the freedom to
choose.

The advent of new technology and new products creates the potential for
dynamic competition–competition between and among technologies and
industries, each seeking to find the best way of serving customers’ needs.
Dynamic competition is different from static competition, in which many
providers compete to sell essentially similar products at the lowest price.

Static competition is good, because it forces costs and prices to the
lowest levels possible for a given product. Dynamic competition is better,
because it allows competing technologies and new products to challenge the
old ones and, if they really are better, to replace them. Static
competition might lead to faster and stronger horses. Dynamic competition
gives us the automobile.

Such dynamic competition–the essence of what Austrian economist Joseph
Schumpeter called “creative destruction”–creates winners and losers on a
massive scale. New technologies can render instantly obsolete billions of
dollars of embedded infrastructure, accumulated over decades. The
transformation of the U.S. computer industry since 1980 is a case in
point.

In 1980, everyone knew who led in computer technology. Apart from the
minicomputer boom, mainframe computers were the market, and America’s
dominance was largely based upon the position of a dominant vendor–IBM,
with over 50% world market-share.

Then the personal-computing industry exploded, leaving older-style
big-business-focused computing with a stagnant, piece of a burgeoning total
market. As IBM lost market-share, many people became convinced that
America had lost the ability to compete. By the mid-1980s, such alarmism
had reached from Washington all the way into the heart of Silicon Valley.

But the real story was the renaissance of American business and
technological leadership. In the transition from mainframes to PCs, a vast
new market was created. This market was characterized by dynamic
competition consisting of easy access and low barriers to entry. Start-ups
by the dozens took on the larger established companies–and won.

After a decade of angst, the surprising outcome is that America is not only
competitive internationally, but, by any measurable standard, America
dominates the growth sectors in world economics–telecommunications,
microelectronics, computer networking (or “connected computing”) and
software systems and applications.

The reason for America’s victory in the computer wars of the 1980s is that
dynamic competition was allowed to occur, in an area so breakneck and
pell-mell that government would’ve had a hard time controlling it even had
it been paying attention. The challenge for policy in the 1990s is to
permit, even encourage, dynamic competition in every aspect of the
cyberspace marketplace.