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A Headstart Counts For Nothing

March 12, 2005

An article in the New York Times once again illustrates how tenuous "market power" is. In How the iPod Ran Circles Around the Walkman, Silicon Valley based historian Randall Stross points out that all of Sony's market dominance of the past did not help it when the iPod came along, (emphasis mine):

At first glance, digital music is the field in which Sony's considerable assets seem best suited, with a little rearrangement, for a comeback. On one side, Sony has 50 years of experience in producing portable music players, beginning with transistor radios in the 1950's and extended by its Walkman franchise that has sold more than 340 million players. On the other, it owns one of the world's largest music labels to supply content. Yet in the iPod era, Sony's headstart counts for nothing. It's as if the company were the Sony Graphophone and Wax Record Company.

This important point cannot be emphasized enough. The oft-told tale of the market Goliath being defeated by the entrepreneurial David illustrates the important theoretical point that however high a businessman rides today, his position is precarious and subject to the consumer. As Mises writes in Human Action:

A "chocolate king" has no power over the consumers, his patrons. He provides them with chocolate of the best possible quality and at the cheapest price. He does not rule the consumers, he serves them. The consumers are not tied to him. They are free to stop patronizing his shops. He loses his "kingdom" if the consumers prefer to spend their pennies elsewhere.

One of the important implications of this point is that fear of "market dominance" is misplaced as regards companies that achieved their position through pleasing consumers as opposed to being part of corrupt "public-private partnerships". The government's anti-trust case against Microsoft, for example, is based on a misunderstanding both of how Microsoft achieved its success and how it will, eventually, be superceded. Because it isn't just in the iPod era that a headstart counts for nothing.

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