how competitive is the internet industry?
In the midst of a debate on whether to regulate facebook, Chris Dixon and Keith Rabois raise an interesting quesiton — how competitive is the internet industry?
Chris makes the point that some industries are inherently uncompetitive. But Keith thinks its hyper competitive. Later, Chris agrees.
How do you know if an industry is competitive or not? Economic theory says that in the long run, the presence of competition reduces companies’ excess profitability. Highly competitive industries have low returns — think Airlines, or trucking.
By this definition, consumer internet is not that competitive, since the largest players (e.g., GOOG, EBAY) are able to earn very high returns. Another less conventional example is craigslist, which does over $100M in revenues with less than 50 employees. And there is a lot of venture capital invested in consumer internet companies. VCs aren’t exactly flocking to invest in airlines.
But at the same time, there are thousands of small consumer internet companies struggling to attract users, revenues, and profits. A large number of the firms in the industry earn little to no returns.
So the distribution of profits looks like a bell curve, with a few dominant firms earning high returns, and a large number of firms earning poor returns. This is kind of reminiscent of the music industry — for every U2, there are tens of thousands of garage bands. This distribution is probably similar to the biotech industry, which has lost money in total, despite the successes of companies like AMGN and DNA.
The question then, is how do you tell if something is a good industry? Do you have to measure the industry profitability in aggregate?
