It is every company’s dream to out-compete its neighbors. Whether a business is advertising smear campaigns, or is lowering its own prices to entice customers, each company is doing its best to stay afloat. Generally, this unending chain of marketing techniques results in a competition stalemate, yet every so often, one business pulls ahead of the other and forces it out of business. As a result, with the sudden lack of competition in the market, a horizontal monopoly is created. With the market closed in this manner, consumers only have one choice when purchasing their commodity. This allows the monopoly to reap the monetary value of the market, and control what the consumer receives in the product. On the contrary, according to Tim Wu in his book The Master Switch, “…whatever has been closed too long is ripe for ingenuity’s assault..." (Wu 6). As the monopoly is attacked by new innovators, the chance that the market will reopen and become decentralized increases. Wu defines this alternating open/closed pattern as “The Cycle."
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| Photograph taken in December 2004 by Kornelia und Hartmut Häfele |
Throughout The Master Switch, Wu gives the reader numerous examples of companies that exemplify this open and closed pattern, one of the first and more notable being the AT&T monolith. By out competing many of the smaller companies with tactics such as “predatory pricing,” AT&T quickly rose to dominate the commercial telephone sector (Wu 49). Yet as AT&T reached the peak of its success, it faced a storm of innovators-- as predicted by Wu roughly ninety years later -- that were eager to find their fortune in the telephony market. These small entrepreneurs, as described in my previous blog post Leaving the Door Open, were seen as a threat to the monopoly and consequently struck down as soon as they developed additions to the standardized AT&T telephone. The exception, however, was a small, rubber cup designed to fit over the phone’s receiver. Known as the Hush-A-Phone, the simple add-on was created to give the customer an added amount of privacy when talking on the phone. Contrarily, as soon as the Hush-A-Phone was marketed, designer Henry Tuttle was quickly attacked by AT&T. Determined to prevent any one inventor from developing an item that could potentially destabilize the centralized telephony market, AT&T engaged Tuttle in a major lawsuit. Afterwards, it was determined that AT&T could not inhibit a company from developing an add-on device, and that the consumer should be able to use the device without fear of violating their contract if they please. This ruling was controversial, and served as a precedent for other innovators that followed after Tuttle. With an influx of smaller producers, the AT&T monopoly was disbanded, thus completing Wu's cycle.
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| Photograph taken in Winter 2003 by Stefan Kühn |
Following the Hush-A-Phone incident and the disbanding of AT&T, Wu includes a passage on the development of the FM bandwidth. Decades ahead of its time, frequency modulated radio, as it was eventually named, was developed when Edwin Armstrong was tasked by David Sarnoff to invent a device that “might remove the static and distortions of AM radio” (Wu 126). Little did either innovator know that the resulting device would disrupt AM radio, and revolutionize radio broadcasting. By altering the frequency of the radio wave, instead of its amplitude, FM broadcasts were produced using less energy, and were capable of traveling farther distances with less static, making them ideal for broadcast stations. By selling his patents to the Radio Corporation of America (RCA), Armstrong was hoping to make a substantial profit. Conversely, RCA saw FM radio as a threat to its current AM radio market and put the idea on the back burner. Furthermore, to prevent anyone from tampering with the FM technology without its permission, RCA banned commercial FM broadcasting, except for private use on a select group of high-frequency bandwidths. To combat this closed market, Armstrong continued to tinker with his new invention, in the process proving that FM radio waves were also capable of carrying telegrams and facsimile reproductions of the New York Times (Wu 129). Even after proving the superiority of FM radio, it took several years before RCA began to open up to Armstrong and the now growing group of amateur FM radio broadcasters. With this last fact, it is hard not to wonder what might have happened if RCA had not placed a restriction on FM radio's development, or conversely if they had not released the restriction at all. Would the affect on the AM radio monopoly been worse? Would the cycle accelerate or slow?
By analyzing these examples, it is clear that the cycle played a part in the continuous opening and closing of both the telephone and radio markets. In a sense, this cycle is beneficial, as it prevents one company from continuously controlling a specific market, and allows the underdog to have a chance at prosperity. Yet, Wu also gives a reason as to why so many monopolies fostered the harsh, unrelenting attitude that has come to stereotype them. Towards the end of part II, Wu claims that “the best antidote to the disruptive power of innovation is overregulation” (Wu 128). Here Wu supports the actions that monopolies have taken to choke out the competition, and suggests a way for them to continue prospering, thus bypassing the disbanding affects of The Cycle. Yet, although immunity to the cycle is theoretically possible, no one has been able to achieve it: the cycle has thus far been applicable to all corporations around the world, both past and present. Put simply, the cycle is unstoppable and inevitable, and even the strongest monopolies -- Verizon and the new AT&T -- will soon fall victim; for this reason it remains Wu's central and most compelling claim.
Works Cited:
- Häfele, Kornelia, and Hartmut Häfele. Alt Telefon.jpg. 2004. Photograph. Wikipedia. Wikipedia. Wikipedia, Dec. 2004. Web. 23 Jan. 2011. <http://en.wikipedia.org/wiki/File:Alt_Telefon.jpg>.
- Wu, Tim. The Master Switch: The Rise and Fall of Information Empires. New York: Alfred A. Knopf, 2010. Print.
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