Written on 11 Nov 2021 by Reda Cherif and Fuad Hasanov

In the footsteps of Bell Labs: Big Tech, competition, and innovation

The creation of a digital superstructure has led to market concentration and the rise of Big Tech, increasing inequality and potentially stifling innovation and growth. Reda Cherif and Fuad Hasanov argue that these trends can be reversed if firms create and diffuse new technologies, and pave the way for a new wave of innovation and productivity gains.

The age of personal computers and the Internet brought into being a type of entrepreneur-innovator with a vision of connecting the world. These pioneers of the digital frontier innovated and competed fiercely, not always playing fair. The Billion Dollar Code, a recent dramatisation of a Berlin startup developing earth mapping technologies in the 1990s, illustrates well this spirit of innovation and competition as well as the risks of being outmanoeuvred by larger Silicon Valley firms.

Some of the tech firms have grown into “superstars”, the titans known as Big Tech, with market valuations in the hundreds of billions or even more than a trillion dollars. But their contributions in the form of transformative innovations, although real, are dwarfed by the achievements of the former generation of technology firms. Indeed, in the 1950s and 1960s, the pioneering Bell Labs made key contributions to the invention and development of transistors, fibre cables, satellites, cellular phones, lasers, computers, software, including UNIX, information theory, and even electronic music.

The combination of all these innovations laid the foundations of today’s digital superstructure, connecting consumers, workers, and businesses on a global scale through a plethora of devices such as computers, smartphones, watches, and soon appliances and self-driving cars.

Big Tech became dominant on the back of this digital superstructure by creating new markets for online services such as ride-hailing, social connections, and search advertising, and leveraging the inherent network effects and increasing returns to scale. Being early movers has given them a decisive advantage, with network effects likely to be stronger in the digital arena than in classical networks such as utilities or the telephone. Connecting workers, businesses, and consumers provides an ever more powerful network effect while increasing returns have allowed firms to scale up fast and earn huge revenues. The dominant position of Big Tech has further led to the loss of bargaining power by less skilled workers and small businesses.

For example, Uber increased competition among taxi drivers to the benefit of consumers of taxi services. Amazon increased competition among small businesses and third-party sellers, with which it competes using its own products. Even local governments, buying school supplies from Amazon, lost substantial amounts.

In addition, Big Data, coupled with machine learning and artificial intelligence, and deep pockets, make it easier for Big Tech to branch out and dominate an increasing number of markets in the digital superstructure (a strategy described as ‘envelopment’). Although there is evidence that industries with increased market concentration also happen to be the most dynamic sectors with potentially greater competition, it does not necessarily mean that intense competition in these industries can continue.

Firms create barriers to entry by acquiring potential threats such as startups and young firms, aptly described as “killer acquisitions” or using their control of data. For example, access to health data collected by smartwatches could lead to Big Tech entry into the health insurance sector, perhaps initially enhancing competition but eventually resulting in a dominant market position, preventing new entrants and stifling innovation.

Bigness is not necessarily bad as large firms are more productive and pay higher wages, but it is harder to regulate, opens the doors to monopoly powers, and may reduce total investment and innovation. In their book Capitalism Without Capital, Haskel and Westlake argue that the rise of superstar firms with their large intangible capital such as intellectual property and brand names has reduced total investment in the economy. There has been a strong push toward a revival of the structural (or ‘Brandeisian’) school of thought in competition policy for Big Tech, which is in favour of taking a direct view of corporate power, including in terms of political influence. This contrasts with the Chicago school in competition policy, dominant since the 1980s in the US, and more focused on low prices and consumer benefits within a narrow view of markets.

In parallel to tougher competition and regulatory policies, though, Big Tech itself needs to ramp up their contribution to innovation and technology diffusion just as Bell Labs did half a century ago. From the 1930s to the 1950s, AT&T, which held a monopoly position in the provision of telephone services over most of the US, invested heavily in both basic and applied research through Bell Labs. It allowed Bill Shockley, who received the Nobel Prize in Physics in 1956 with his colleagues Bardeen and Brattain for their work at Bell Labs, to set up his own firm to produce transistors, seeding the Silicon Valley phenomenon.

It offered affordable licenses and even workshops to train other firms on the new technologies (one of the alumni of this workshop went on to found Sony). Of course, these contributions were also meant to placate an assertive regulator, increasingly wary of the monopoly power of the Bell system. In 1956, as part of the antitrust case against Bell, the patents of Bell Labs were made available for free to all US firms, spurring a wave of innovation in the economy. Ironically, one could argue that Bell Labs’ contribution to innovation peaked due to its access to the vast revenues of AT&T until the monopoly was broken up in the 1970s.

Instead of playing out the dark side of The Billion Dollar Code scenario of absorbing or blocking all potential competitors, Big Tech could be incentivised to use a portion of their vast revenues to set up research labs at arm’s length, contributing to both fundamental and applied research and favouring technological diffusion, including toward developing countries. These tech titans already invest in R&D and leverage their data to develop artificial intelligence products or other services, but these focus on creating proprietary technologies further entrenching their dominant positions.

The new research centres should instead focus on risky and long-term projects, aiming at solving the world’s most pressing problems including climate change. More importantly, they would spur innovation and productivity gains instead of stifling them. Perhaps there is a golden opportunity to offer the world again not just one, but many Bell Labs.

Image: Bell Labs by Ezra Stoller

  • About the author

    Reda Cherif, Affiliated Researcher

    Reda Cherif is a Senior Economist at the International Monetary Fund (IMF). He joined the IMF in 2008. His research covers development economics, natural resources, industrial policy, and growth and innovation. His recent book co-edited with Fuad Hasanov and Min Zhu, Breaking the Oil Spell, ...   Learn more

  • About the author

    Fuad Hasanov, Affiliated Researcher

    Fuad Hasanov is a Senior Economist at the International Monetary Fund (IMF) and an Adjunct Professor of Economics at Georgetown University. Before joining the IMF in 2007, Fuad was an Assistant Professor of Economics at Oakland University in Rochester, Michigan. His recent research focuses on ...   Learn more