Contents

Why Are Dominant Firms Part of the Tech Sector’s DNA? 2

The Benefits of Bigness 3

The Potential Downsides of Dominance. 5

Weighing the Balance. 6

Talking Points 6

During his recent farewell address, President Biden warned of an ultra-rich oligarchy taking shape in America “that literally threatens our entire democracy,” and he went on to single out “the potential rise of a tech industrial complex.” To many, these fears were reinforced by the sight of so many prominent technology CEOs making pilgrimages to Mar-a-Lago, and then being given prime seats at President Trump’s inauguration. Concerns about the power and influence of Big Tech are once again widespread in the press, on social media, and across the political spectrum—perhaps most notably in the MAGA wing of the Republican coalition. Is this a new phase of the techlash that has gripped American politics and culture in recent years?

Of course, it’s easy to dismiss such concerns as mostly hypocrisy or sour grapes. Where were all these complaints when George Soros, Reid Hoffman, Michael Bloomberg, Sam Bankman-Fried and many others were lavishly funding Democratic causes? Remember when the Left praised Jeff Bezos and Laurene Powell Jobs for buying The Washington Post and The Atlantic, respectively. Democrats certainly didn’t mind the reach and influence of Big Tech when they pressured it to control online content during the Covid years. And don’t forget that many leading liberal political figures—such as Nick Clegg (Meta), David Plouffe (Uber), and Jay Carney (Airbnb)—were hired by Big Tech firms to help them better deal with Washington.

But hypocrisies aside, concerns about powerful technology companies are as old as the industry itself. No computer company has been or likely ever will be as dominant as IBM was in the 1960s and 1970s when it had well over half of all computer-industry revenues, just as no telecom company is likely to match the power of AT&T in the 1950s, ‘60s, and ‘70s when it had a near monopoly on the U.S. market. Likewise, in the 1980s and ‘90s, Intel and Microsoft enjoyed PC market shares exceeding those of today’s Internet giants. Looking back, the history of the information technology industry has been inseparable from that of its most dominant firms.

Why Are Dominant Firms Part of the Tech Sector’s DNA?

The pattern of dominant hi-tech companies isn’t an accident or the result of nefarious deeds; it’s in the DNA of the technology business. Over the decades, a great deal has been written about why some tech markets are highly concentrated (including by me). Indeed, there are so many credible theories that there’s no consensus on which factors are most important. The first thing to recognize is that, contrary to perceptions, only a few hi-tech sectors today fit the most common definition of being highly concentrated based on the share of revenue going to the top players (examples include the semiconductor and social media sectors), whereas hi-tech sectors overall have been getting less concentrated in recent decades, not more. But either way, there are still dominant players. Why? The first seven factors below have been taken verbatim from ChatGPT in response to the prompt “Why are many hi-tech markets so concentrated?” They are representative of the prevailing thinking on this topic. I’ve also added three other important dynamics after those.

1. Network effects: Many high-tech industries benefit from network effects, where the value of a product or service increases as more people use it. For example, social media platforms, communication tools, and marketplaces become more valuable to users as their user base grows.

2. Economies of scale: High-tech businesses often require substantial upfront investment in research and development, infrastructure, or user acquisition. Once these investments are made, the marginal cost of serving additional customers is relatively low, making it economically advantageous to expand as much as possible.

3. High barriers to entry: The technology sector often has high barriers to entry due to the need for significant capital investment in R&D and technology infrastructure. Additionally, intellectual property protections, such as patents, can prevent new entrants from using existing technology, which further solidifies the position of established players.

4. Data advantages: In many tech industries, data is a critical asset. Larger firms that have access to more extensive data sets can leverage this data to improve their products and services, optimize their operations, and create better user experiences. This creates a competitive advantage that can be difficult for newer or smaller companies to match.

5. First-mover advantages: Companies that enter a market early can establish strong brand recognition and customer loyalty before others. They are often able to set industry standards and influence customer expectations, which can create difficulties for new entrants trying to establish themselves.

6. Acquisition strategies: Larger companies often acquire smaller competitors, innovative startups, or complementary businesses. This not only eliminates potential competition but also allows big companies to integrate new technologies and talent, thereby reinforcing their market dominance.

7. Regulatory influence: Larger firms typically have more resources to influence and adapt to regulatory environments. They can afford extensive lobbying efforts that may result in regulations that inadvertently favor large incumbents or raise additional barriers for new entrants.

8. Customer uncertainty: Technology products and services are often highly complex. Many consumers understandably choose to go with safe, proven companies. The tech industry even has its own acronym for this phenomenon, FUD—Fear, Uncertainty, and Doubt.

9. De facto standards: The technology industry relies on a mix of open and proprietary standards. Businesses that can establish and sustain the latter—as IBM, Microsoft, Intel, Alphabet, Apple, and now Nvidia all have—can enjoy long-term competitive advantages.

10. Global reach: Compared to sectors such as health care, banking, insurance, telecom, utilities, transportation, defense, and education, tech markets around the world have been relatively unregulated and hence global in scale. Large, homogenous global markets amplify all these dynamics.

While the importance of these factors varies by company, taken together they help explain why IBM, AT&T, Microsoft, Intel, Apple, Alphabet, Amazon, Qualcomm, and Meta became so dominant in their respective eras and areas. In each case, there have been major antitrust concerns. But although government interventions have curbed certain corporate practices, it was changing technology that humbled the giants of the past. As we look to the future and the rise of OpenAI, Nvidia, TSMC, Tesla, BYD, TikTok, DeepSeek, and others—not just in the United States, but in China, India, and elsewhere—this pattern of dominant companies rising and eventually falling seems likely to continue.

If anything, today’s technology leaders actually hold less power than companies have in the past. In the 1960s and ‘70s, when IBM dominated computers and AT&T dominated telecom, their markets were almost entirely separate, so neither firm faced strong direct competition. In the 1980s and ‘90s, when Microsoft and Intel dominated the personal computer market, their interests were so closely aligned that they were often referred to as Wintel (as in Windows/Intel). In contrast, the giants of today’s Internet era—Alphabet, Amazon, Apple, Meta, and Microsoft—often compete fiercely with one another, e.g. Alphabet and Apple in smart phones; Microsoft and Amazon in Cloud; and all of the above in AI. These companies can be described as oligopolies, but they are surely not monopolies.

The Benefits of Bigness

Given that this pattern of dominant players is likely to continue, the key question is whether the benefits of this industry structure outweigh the downsides. To answer that question, consider that America’s current technology ecosystem has generated at least seven major benefits:

1. Entrepreneurship and venture capitalism: The dream of being the next Apple, Meta, etc. motivates entrepreneurs and fuels much of the hi-tech start-up and venture capital industry where it’s expected that most investments may fail, but those losses will be more than offset by even a single big winner. Additionally, the ability of large companies to acquire innovative smaller ones is a major exit-strategy incentive for both entrepreneurs and VCs.

2. Global leadership: It’s easy to forget that Europe and Japan once had global information technology ambitions, only to fall far behind the American market giants. The challenge today is to fend off competition from China and India which are in the process of generating their own large and dominant firms, a task vastly more difficult than defeating companies such as Bull, Nixdorf, Olivetti, Siemens, and other one-time European national champions.

3. Economies of scale: As was the case in the past with mainframe computers, and again today with cloud computing and AI, massive investments in facilities and infrastructure are often needed to efficiently realize technology’s potential.

4. Proprietary standards: When clear and lasting company-neutral standards prevail, it often leads to commodity products dominated by Asian companies. Market leaders such as IBM, Microsoft, Alphabet, Apple, Qualcomm, and Nvidia have set proprietary standards for mainframes, personal computers, smart phones, app stores, networking, and AI, respectively. Such company-controlled standards have helped sustain long-term U.S. leadership, which is why the emergence of DeepSeek is receiving so much attention.

5. Customer confidence: Large, stable businesses have the scale to support the complex needs of multinational corporations. At the individual consumer level, dominant suppliers provide safe choices. In both cases, the result is increased customer confidence.

6. Good jobs and wages: Large technology organizations employ millions of people and pay salaries well above average. (The big five giants alone have well over two million employees.) Initially these jobs mostly lifted living standards on the east and west coasts, but this is now changing with important tech centers scattered across the United States.

7. Long-term R&D: Whether we are looking at Bell Labs in the past or Alphabet’s work in AI and quantum computing today, large, highly profitable businesses play an indispensable role in funding research for which payback can be years or even decades away. The top five U.S. technology companies invest over $150 billion annually in research and development—more than any country except the United States and China.

Looking ahead, it’s important to realize that the Internet industry is still in a relatively early phase. Thus far, Big Tech has earned its riches by connecting, entertaining, and informing us, while simplifying many transactions. But technology’s impact on critical societal needs such as health care, aging populations, education, food, transportation, defense, and the larger physical world has been relatively modest. Dominance in these areas will determine the global technology leaders of the coming decades. Odds are that many of these leaders will be companies that don’t exist today, but if we choose to shackle or break-up large U.S. tech companies, then many may well be Chinese.

The Potential Downsides of Dominance

While the above benefits are clear enough, so are the possible downsides. The severity of these problems within the technology industry can certainly be debated (and has been by ITIF). But critics of Big Tech today typically point to seven issues:

1. Extreme inequality: Today 8 of the world’s 10 richest people made their money in the tech sector, with the combined wealth of Elon Musk, Jeff Bezos, Larry Ellison, Mark Zuckerberg, Larry Page, Sergei Brin, Steve Ballmer, and Jensen Huang nearly $2 Trillion. Similarly, the current market capitalization of the so-called Magnificent Seven—Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia, and Tesla—is roughly $18 trillion, or about one-third of the value of all the companies listed on the New York Stock Exchange, Nasdaq, and over-the-counter markets, combined.

2. Strong pricing power: Dominant companies can often charge prices that are well above their average production costs. Many customers feel that they are essentially locked in, meaning that it is easier to pay the higher price than take on the cost and effort of switching suppliers.

3. Anti-competitive practices: Dominant firms can potentially use predatory pricing, exclusivity agreements, and/or leverage their dominant position in one area to gain a decisive advantage in another. Curbing such tactics has often been the primary benefit of government antitrust enforcement actions.

4. Less innovation: Although large businesses often contribute significantly to innovation, if they become too dominant, they might have fewer incentives. (Some have claimed today’s market leaders are already dampening innovation and economic dynamism, but the evidence shows that isn’t the case.) Likewise, innovative smaller companies may not survive or emerge due to high barriers to entry.

5. Societal dependencies: Markets with dominant players increase dependency on a few key firms. This can create national security and economic resiliency risks if these businesses become targets of cyberattacks or face other disruptions.

6. Political influence: Large businesses can influence public policy and regulation through lobbying, donations and other means. This can lead to policies that disproportionately benefit their organizations and/or hinder smaller competitors, potentially leading to regulatory capture. (Although, ITIF research also shows larger firms spend less on lobbying per dollar of revenue—and mergers reduce lobbying expenditures, while spin-offs increase lobbying, on average.)

7. Cultural influence: When a few platforms dominate, particularly in the fields of media and content, it could lead to homogenization and/or distortion and manipulation of cultural products and services. This was much less of a concern in earlier technology eras, when most computing was business-oriented.

All these complaints have their supporters, even if their case is often weaker than they would have you think. But President Biden’s parting warnings were almost entirely focused on the last two items, both of which seem exaggerated. In terms of political influence, the only strong current example is Elon Musk, who has gone all-in for President Trump and the MAGA movement. But who can predict how long this enthusiasm will last, given how volatile both Musk and President Trump can be? In contrast, it seems fair to say that Messrs. Zuckerberg, Bezos, Cook, and Pichai seem mostly interested in getting along with both political parties and avoiding unnecessary controversies if they can. This is an entirely reasonable business strategy, even a fiduciary obligation.

Moreover, anyone familiar with Washington politics knows how little the tech sector spends on influence compared to other industries. For example, the tech industry’s leading trade association, the Information Technology Industry Council, spends only 3.4 percent as much as the National Association of Realtors, which is so big that it has its own office building just blocks from the capital, and is further supported by tens of thousands of real estate agents spread across every congressional district. While individual tech titans make large political contributions and can have a strong media presence, they often include fierce tech critics such as Pierre Omidyar, Chris Hughes, Roger McNamee, Dustin Moskovitz, Jaan Tallinn, and Steve Wozniak.

Today’s cultural concerns also seem manageable. Once again, the only strong example is Musk and X. However, Musk’s shift to the right has already led to the rise of Bluesky and other alternatives. It’s not hard to imagine a social media landscape that looks more like cable television—with X playing the role of Fox News, and Bluesky or another platform that of MSNBC. Additionally, it’s not as if Meta, Google, TikTok and ChatGPT are suddenly going to become right-wing megaphones. From a cultural and employee perspective, they still lean left. Moreover, regardless of what happens in social media, there are so many other content alternatives—television, radio, podcasts, online newspapers and magazines, Substack blogs, etc.—that concerns about dangerous uniformity, individual control, and systematic misinformation seem seriously exaggerated. Has the content available to consumers ever been so diverse, regardless of one’s political leanings?

Weighing the Balance

People assess the pros and cons of large technology companies very differently. Many believe that today’s extreme wealth is inherently immoral and are offended by the coarseness that often comes with free speech. Many others place their trust in free markets and believe that government efforts to regulate businesses and control information will inevitably make things worse. Both sides can make a reasonable case.

But one factor decisively tips the balance. America’s digital ecosystem has produced the world’s leading technology companies for some 75 years. Given that information technology is such a critically important and competitive industry, this is an extraordinary achievement and the envy of the world. Faced with the rising challenge from China, do we really want to abandon such a proven model of success? Both past and recent history says that technology markets will continue to feature large and dominant firms, new and old alike. Making sure these businesses remain American should be the overriding policy goal.

Talking Points

▪ The IT business has always been led by large, dominant firms. Companies such as IBM, AT&T, Intel, Microsoft, Apple, Alphabet, Meta, and Amazon have established markets, set standards, leveraged scale economies, and supported long-term R&D.

▪ These extraordinary business and financial successes motivate both entrepreneurs and the venture capital industry, which is why new players continue to create new markets and disrupt existing ones, as we see with AI today.

▪ The consumer benefits of this model have far outweighed any downsides, as has the importance of America’s global leadership in what is the world’s most dynamic and influential industry.

▪ Given the unprecedented challenge from China, this is no time to lose faith in such a proven approach. Dominant technology leaders will continue to emerge. The over-riding policy goal is to make sure they remain American.