How software is stifling competition, slowing innovation

(NYTIMES) – More than a decade ago, Internet entrepreneur and venture capitalist Marc Andreessen famously declared, “Software is eating the world”.

The winners, he wrote in The Wall Street Journal, would be mainly “entrepreneurial technology companies that are invading and overturning established industry structures”.

His essay was a distillation of a long-held article of faith in Silicon Valley.

Clearly, some traditional businesses such as advertising and retailing have been upended by software-fuelled companies such as Google, Facebook and Amazon, the new giants in the corporate landscape. But there is also a very different software story, according to Mr James Bessen, executive director of the Technology and Policy Research Initiative at the Boston University School of Law.

In a new book, Mr Bessen challenges what he terms the “disruption myth”. He makes the case that big companies in one industry after another have built complex software systems for managing their sales, marketing, operations and product offerings that are essentially moats against competitors. This mastery of software by major corporations, he argues, helps explain rising economic concentration, increasing inequality and slowing innovation.

“This is a broad swath of the economy – way beyond a handful of Big Tech companies in Silicon Valley,” said Mr Bessen. “There is an advantage to software that economists haven’t really reckoned with yet. Software isn’t accelerating creative destruction today. Software is suppressing it.”

Mr Bessen brings an unusual perspective to his economic analysis. He is a former software entrepreneur from the personal-computer era who founded an early desktop publishing software company, which he ran for a decade. When he sold his venture to a larger company in 1993, he made millions.

It was pocket change by the standards of today’s tech start-ups, but it meant career freedom for Mr Bessen. He then got in touch with his former roommate at Harvard University, Dr Eric Maskin, who had become an economics professor at their alma mater.

Mr Bessen explained that he had ideas about the software industry that might be of interest to economists, Dr Maskin recalled. The two went on to write a research paper on why patents often worked against innovation in software, an industry that prospered when information was shared.

The joint study helped start Mr Bessen’s career as an academic. His research has focused mainly on the economics of innovation and the broad impact of technology. The title of his book, The New Goliaths: How Corporations Use Software to Dominate Industries, Kill Innovation and Undermine Regulation (Yale University Press), suggests a strident critic.

But his past research has also come down on the side of technology. In 2015, amid rising concerns that automation was a job killer, Mr Bessen published a paper that examined the impact of computer automation on 317 occupations from 1980 through 2013. His summary conclusion: “Employment grows significantly faster in occupations that use computers more.”

Mr Bessen is an entrepreneurial outsider to the field of economics. He has forged an unorthodox career in academia, rising to prominence gradually over the years, one intriguing research project at a time. He has become respected in economic circles without a doctorate.

Mr Bessen’s observations about increasing market concentration, rising inequality, and slowing innovation and productivity echo those of other researchers. Most of those studies, though, are high-level economic research. His focus is a more detailed look within industries and at individual companies, seeking the underlying technology engine behind the broad economic trends.

“He has a new, complementary perspective on what we’re seeing,” said economist Chiara Criscuolo at the Organisation for Economic Cooperation and Development. “It gives you much more of the mechanism for why we got to where we got.”

That mechanism is what Mr Bessen calls “proprietary software”.

He defines it broadly as not only code but also the data that companies collect on their customers and operations, the skills of their workers and the organisational changes they have made to exploit the technology.

His measure of proprietary software does not include spending on the standard business software from companies such as Oracle, SAP and Salesforce. Instead, it is the investment that companies make in custom software from those suppliers and others, and in their own in-house applications. Some of the software may be freely available open-source code, he notes, but the overall system is closed.

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