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How Software Is Helping Big Companies Dominate

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How Software Is Helping Big Companies Dominate

Throughout the global economy, big companies are getting bigger. They’re more productive, more profitable, more innovative, and they pay better. The people lucky enough to work at these companies are doing relatively well. Those who work for the competition aren’t.

Policymakers have noticed. Antitrust and competition policy are seeing renewed interest, including recent hearings on the subject by the Federal Trade Commission. Headlines in publications ranging from The Nation to The Atlantic to Bloomberg warn of America’s “monopoly” problem with calls to break up big companies such as Google or Amazon or Facebook. “Imagine a day in the life of a typical American,” writes Derek Thompson in The Atlantic. “How long does it take for her to interact with a market that isn’t nearly monopolized?”

Antitrust deserves the attention it’s getting, and the tech platforms raise important questions. But the rise of big companies — and the resulting concentration of industries, profits, and wages — goes well beyond tech firms and is about far more than antitrust policy.

In fact, research suggests that big firms are dominating through their use of software. In 2011, venture capitalist Marc Andreessen declared that “software is eating the world.” Its appetizer seems to have been smaller companies.

                                                                                             Photo: Data analysis with software

What’s Driving Industry Concentration

Most industries in the U.S. have grown more concentrated in the past 20 years, meaning that the biggest firms in the industry are capturing a greater share of the market than they used to. But why?

Research by one of us (James) links this trend to software. Even outside of the tech sector, the employment of more software developers is associated with a greater increase in industry concentration, and this relationship appears to be causal. Similarly, researchers at the OECD have found that markups — a measure of companies’ profits and market power — have increased more in digitally-intensive industries. And academic research has found that rising industry concentration correlates with the patent-intensity of an industry, suggesting “that the industries becoming more concentrated are those with faster technological progress.” For example, productivity has grown dramatically in the retail sector since 1990; inflation-adjusted sales per employee have grown by roughly 50%. Economic analysis finds that most of this productivity growth is accounted for by a few companies such as Walmart who used information technology to become much more productive. Greater productivity meant lower prices and faster growth, leading to increased industry dominance. Walmart went from a 3% share of the general merchandise retail market in 1982 to over 50% today.

All of this suggests that technology, and specifically software, is behind the growing dominance of big companies.

                                                                                                           Photo: TIBCO software

IT Does Matter

In 2003, then-HBR-editor Nick Carr wrote an article (and later a book) titled “IT Doesn’t Matter.” Carr took issue with the common assumption “that as IT’s potency and ubiquity have increased, so too has its strategic value.” That view was mistaken, he argued:

“What makes a resource truly strategic—what gives it the capacity to be the basis for a sustained competitive advantage—is not ubiquity but scarcity. You only gain an edge over rivals by having or doing something that they can’t have or do. By now, the core functions of IT—data storage, data processing, and data transport—have become available and affordable to all. Their very power and presence have begun to transform them from potentially strategic resources into commodity factors of production. They are becoming costs of doing business that must be paid by all but provide distinction to none.”

Carr distinguished between proprietary technologies and “infrastructural” ones. The former created competitive advantage, but the latter were more valuable when broadly shared and so eventually became ubiquitous and were not unique to any company. IT would temporarily create proprietary advantages, he predicted, citing Walmart as an example. Walmart is the country’s largest employer and largest company by revenue and it reached that position through an operating model made possible by proprietary logistics software. But Carr believed that by his writing in 2003 “the opportunities for gaining IT-based advantages are already dwindling” and that “Best practices are now quickly built into software or otherwise replicated.”

It didn’t turn out that way. Although rivals have tried to build their own comparable logistics software and vendors have tried to commoditize it, Walmart’s software acumen remains part of its competitive advantage — fueled now by a rich trove of data. While Walmart faces new challenges competing online, it has maintained its logistics advantage against many competitors such as Sears.

The “Full-Stack” Startup

This model, where proprietary software pairs with other strengths to form competitive advantage, is only becoming more common. Years ago, one of us (James) started a company that sold publishing software. The business model was to write the software and then sell licenses to publishers. That model still exists, including in online publishing where companies like Automattic, maker of the open source content management system WordPress, sell hosting and…

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