Apple and the End of Technological Progress

Hyperbolic title, but as I'm just starting to read Average is Over by Tyler Cowen, I couldn't help but think about what sort of limits there are to some of the technologies Cowen predicts in his new book.

All of the smart technologies we can hopefully expect depend on interconnectivity, and any sort of technology that depends on this sort of interconnectivity faces the same monopolistic temptations as any other ambitious company. Every company in a competitive market, at least on some level, has the goal of destroying its competition.

If you have a traditional monopoly, you have traditional consequences. A utility company with a natural monopoly doesn't face the same price pressures that a competitive market does, and won't innovate as fast as if it were in a competitive market. for these traditional monopolies, we also have traditional solutions: governments come in to regulate prices. In terms of innovation, I'd argue that natural monopolies are also industries in which innovation has a lower value. Think about how much improvement one can reasonably expect in a city's water infrastructure (a contrary example to his might be the fact that we don't have true high speed rail in the United States yet.)

Things are different in the tech sector. The temptation to create "walled gardens" and closed app ecosystems could be compared to the natural utility monopolies. Prices have completely different meanings in the tech sector and discussing that would probably warrant its own post, but there is a very clear link between the creation of these walled gardens and innovation.

Consider Apple. Apple makes several products that they sell directly to consumer, and maintain an ecosystem surrounding these products. They don't charge directly for the ecosystem, but the ecosystem adds value to Apple's products, and therefore Apple is incentivized to make this ecosystem as flawless as possible, in order to make their products more valuable. This is a positive externality: assuming the price of the products remain the same, consumers get the benefits of the ecosystem for free. Of course, Apple recaptures some of this value by selling its products at a premium.

Part of this value is a "stickiness." Consumers begin to depend on the ecosystem. The longer a consumer remains in the ecosystem, and the more consumers are in the ecosystem, the harder it is for that consumer to leave the ecosystem. As an ecosystem becomes more successful, the company faces fewer incentives to improve it. This is a classic negative feedback loop, and acts as a drag on innovation. The ecosystem sows the seeds of its own destruction.

Google addresses this problem as a company. It realizes it is in its own best interest to continue to innovate, and while a walled ecosystem will lead to monopoly power, it cannot afford to stultify its own evolution. This is why Android is open, why Google lets you (relatively) easily get your data out of their services. It's far from perfect, but at least it's a recognition that this is an issue, rather than the blatant ignorance of the issue by a company like Apple.

There are unfortunately more Apples out there than Googles. At this point in our economic development, the benefits that Google is foreseeing are too long term for a vast majority of companies. Even Google is only to a degree paying lip service to this concept rather than fully embracing the concept (cough Google+.) As far as I'm aware, there does not exist a way to properly align incentives within our economy to avoid this drag on innovation.

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