Exclusivity contracts are killing entrepenenurs - can we kill them?

https://news.ycombinator.com/item?id=309982

by smakz • 18 years ago

4 5 18 years ago

news.ycombinator.com

Exclusivity contracts are killing the entrepreneurs in this country. My past two ventures have hit hard roadblocks due to entrenched players having exclusive access to provide goods and services to large companies.

Here are the kinds of exclusivity contracts I'm talking about (the examples I ran into deal with smaller players, but in spirit this is the kind of thing I'm talking about):

* AT&T is the exclusive provider of iPhone. If you wanted to start a cellular network, you could not provide the phone that most people want.

* Ticketmaster is the 'exclusive' provider of tickets at all major venues. If you wanted to sell tickets, you couldn't at these places.

* Sony pays Konami to only publish a game (Metal Gear Solid 4) for their Playstation 3 platform.

* VISA and Mastercard pay stores to only provide their cards and exclude other cards.

* Google paying myspace to be the sole search provider for their web site (and MS doing the same with facebook).

In my perfect world, ALL of these contracts would be illegal because they artificially raise the barrier of entry for entrepreneurs like us. It is not the 'market' ie, customers deciding which service provider is the best and most innovative, it is the businesses themselves negotiating the best rate and putting smaller players out of the competition.

In my opinion, the above is no different then Standard Oil promising the rail road companies a paycheck each month for a discount on shipping costs (which is one of the main reasons they were identified as a monopoly that needed to be broken up). In fact, I don't think Standard Oil should of been broken up, they should of changed the laws so that it becomes easier for competitors to enter the market place (which they did as well - make rail road companies charge the same rates to everybody, etc.).

My question to hacker news - is there any basis to bringing up a case with the DoJ, name all the companies above in the suit, and get rid of these moronic 'exclusivity agreements' once and for all? Or does the company have to be an obvious monopoly (ala Standard Oil/Ticketmaster) and even then is the only recourse to break up the company (which is incredible stupid)?

HeyLaughingBoy• 18 years ago

That's a great idea until you decide that you want a contract to be exclusive provider for X.

I currently have a product that I sell to a single customer who spends $1,000's/year with me and he packages it up with other stuff and resells it (kinda like AT&T/iPhone, dontcha think?). Under your "perfect world," his competitor can come to me and force me to do business with them whether or not I want to.

bradgessler• 18 years ago

This is a two way street. In some cases, exclusivity helps entrepreneurs if they're savvy enough to land those types of deals.

SwellJoe• 18 years ago

There are also exclusive deals in our industry...and they've been aggressively pursued by the second most popular product in the field--such that ~20% our biggest potential customers probably can't buy from us until their contract ends, even if they wanted to. But, it's not something I would want to try to solve with legislation. All contracts (exclusive or otherwise) have an end date--your job as an entrepreneur is to recognize this, and be prepared to wait it out, with other aspects of your business filling in the gaps.

In the case of tickets: Go after the smaller venues. Make people happier--people hate Ticket Master. Seriously, you don't get a universally accepted moniker like "Ticket Bastard", if your customers are satisfied. The landscape can change dramatically in two or three years as those exclusive contracts start to fall off. If another ticket seller has built up the relationships with the small acts and labels as they grew up, there could certainly be a window in there. Proper business development in a field like that is far harder than the technical side of things...and so I suspect what kills alternatives is just that Ticket Master has mastered the business development side of the equation. So, you'd have to master that, plus provide better customer service and more fair pricing, in order to beat them. The exclusive contracts came later for Ticket Master--after they were already the far ahead leader in the field.

In the case of video games...so what? How does that hurt anyone? There are hundreds of new titles being released this year for PC, Wii, and X Box 360, why would one (I guess really popular) title being exclusive to PS3 be all that big of a deal? It's certainly no problem for game makers, who will have better sales of their similar games on other platforms. And it'll probably only marginally hurt MS and Nintendo (who also have exclusive games to make up for it). And who says Konami wanted to invest the resources required to build their game for the other platforms? Maybe it doesn't make business sense for them to do so. Are you going to force Konami to build games for every game console? Who determines what is a game console? Can I put up a website selling Linux "consoles" and force Konami to port to Linux because I want to play cool games on my Linux desktop machine?

VISA and Mastercard. So what? AmEx does it, too. It's a credit card. It's not real money. Are you saying every company should have to extend credit to everyone, as long as they have some card in their pocket? Diners Club? Discover? Despite the fact that all cards have different contracts with different terms, and different processing rates. Many businesses don't accept AmEx, for example, because it is significantly more expensive to process. An exclusive contract is merely another aspect of this competitive landscape--it goes on far behind the scenes, of course, since consumers generally have no idea how credit cards work or what it costs when they use a credit card, but it's still just multiple companies trying to figure out how to one-up each other in the market while still making money.

Websites...again, so what? There are billions of websites, and like over 9000 new ones going online every day. Exclusivity on one is not a big deal. And it makes no sense for MySpace or Facebook to have multiple search providers...so who're they hurting by entering an exclusive contract? Nobody. In a year, maybe two, maybe three, you'll get another shot at that site. Contracts are temporary, and tenuous, things.

Your perception of what is fair seems a bit off-kilter with a competitive capitalist economy (which is required for any of us to do the things we want to do). Contracts, exclusive or otherwise, are fair play. If someone were offering a better deal, in all of these cases, the next time the contract term expired, things would change. There's nothing perpetual about any of the situations you've mentioned, and nothing to prevent competition.

The things I have a problem with are much more difficult to deal with: power companies have monopolies enforced by local governments, phone companies and cable companies have monopolies or duopolies over the last mile for broadband, broadcast television stations have practically permanent licenses to operate on their frequencies based on 50+ year old deals (though this got shaken up by the move to digital, and new ranges were opened up and auctioned off), trucking companies have practically free roads while railroads have to build their own (but, railroads have some grandfathered in land that they got for free 100 years ago to even things out a little). If you want to talk anti-competitive look to industries where the same major players have been in control for 50, 100, or more years.

So, while I do think AT&T is a dangerous animal that has way too much control over the government, and should not be trusted, it's not because they have an exclusive deal with Apple. AT&T is dangerous and anti-competitive because they have the government in their pocket, and they can pretty much do anything they want. The last mile in many parts of the US is owned entirely by AT&T, and 90% of independent ISPs have shut down because of this fact. A few cable operators have strongholds, and are defending them reasonably well, and so there is the appearance of competition. But in any given city--even here smack dab in the middle of silicon valley--there's usually only one or two broadband providers, and it's usually AT&T and/or whatever cable company serves the area.

Likewise VISA and Mastercard...the credit industry is hostile to consumers, and resistant to further competition (newest credit card to enter the field is, I guess, Discover...but it spawned off of the Sears card, which had existed for years), but not because of a few exclusive deals with retailers. It's difficult to enter the field because of the regulatory environment...and while it seems like the card companies should oppose the huge regulatory barriers to working in their industry, in reality it just raises the cost of entry. The established players pay, say, 1% of their revenue to deal with regulatory overheard...but a smaller company entering the industry would find that they have to expend 25%. The same effect happens to small businesses with regard to taxes and payroll and such--my business pays a far larger percentage of revenue for these tasks than Google or MS. In more regulated industries the differential becomes prohibitive to the smaller businesses even existing.

So, the answer is: No. There is no basis for bringing up a case with the DoJ in any of the instances you mentioned (probably even Ticket Bastard). And, no. Breaking up the company in the current political climate is simply not likely. Look to the Microsoft case from a few years ago for an example of how things will play out (here and in Europe). Fines, promises to not do the naughty things any more, etc. Breaking up a company is considered an unnecessarily disruptive operation these days. And, there are very few, if any, companies that meet the level of monopoly that AT&T had when it was broken up (even AT&T today, after re-merging all of its parts back into one evil ugly whole again in recent years, is nothing like T of old).

hs• 18 years ago

you can make an 'opposite' service to break exclusivity

for example, a site that compares different insurance policies/companies, etc

in my case (not from the US), i wanted to sell mutual funds and claim 1% marketing fee :) ... i even passed mutual-fund-manager-certificate-govt exam (just in case, also out of curiosity)

to my surprise (6 months and 1 web app later), only bank is allowed to sell investment packages to individuals (for security reasons)

so not only i cannot take 1% cut (i'm not a bank), banks also do not want to deal with unproven small fry

eventually, i changed my site into site that compares various mutual funds (tables, graphics - love jquery+flot)

but alas, most of them performs below the index; so comparing them shows how bad the funds actually are

anyway i ended up making it a non-profit site ... users love it and i got various feedbacks applicable to my other web apps

tptacek• 18 years ago

No. Those companies don't have monopolies. Take your first example, consider this, and then extrapolate:

AT&T isn't the only cell phone network provider in the market, or even a dominant one.

Apple isn't the only smart phone vendor in the market, or even a dominant one.

Together, AT&T and Apple dominate only a market for Apple's own branded product. Apple could simply choose not tell iPhones at all. It's hard to see how anything the two companies do together restrain trade. You do not have a right to redistribute or enable Apple's own products.

Ticketmaster has been the subject of repeated antitrust inquiries, and has survived --- rightly so. Ticketmaster is under increasing threat of obsolescence by companies like Live Nation, which are vertically integrating (for instance, by signing record contracts with artists) and changing the business model.

Etc, etc, etc. You have a better chance of boiling the ocean than of reconfiguring capitalism to improve your startup's chances. Look elsewhere.

Exclusivity contracts are killing entrepenenurs - can we kill them?

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