Natural monopoly behavior has dominated many of the biggest markets in since the dawn of free enterprise. But recent innovations are demonstrating the potential to break down many of these entrenched market positions, and in some cases, they are already actively doing so. This is a very good thing for consumers and a huge entrepreneurial opportunity.
What is a "natural monopoly"? It's an economic term that describes any market situation where the conditions lead to just one firm supplying a product or service, versus more open competition. It's not necessarily a "monopoly" in the more popular sense, but is a looser term describing an incumbent that enjoys such high barriers to entry that no one else can really enter their market niche and compete. These also tend to crop up in highly regulated markets, although that's not always the case.
The classic example is the electric utility. Once a local utility sets up all the distribution wires and infrastructure, it's hard for another utility to come in duplicate that system at great cost, just to compete on lower margins.
Another looser example, driven in part by regulations, would be how most local taxi markets work. A set number of medallions are made available through local regulatory fiat, so a few firms get entrenched as the major players, and it's tough for new entrants to break in. (In this case, it's a "natural oligopoly," I suppose.)
Or you can find natural monopoly situations in niches within otherwise competitive markets. For example, if you want to travel from Boston to Montreal, a seemingly short trip, there's really no train option and driving takes a full day. There's currently only one airline that services the direct route, so that airline has a natural monopoly on that route.
Such natural monopolies often end up displeasing customers. Everyone has a favorite "bad customer service" story to tell about their local utility or cable company, or a tale to tell about a bad taxi experience that went unpunished. And that flight to Montreal from Boston? It currently costs more than twice as much as a flight from Boston to San Francisco.
That means there's a lot of entrepreneurial opportunity in suddenly giving a choice to customers who are otherwise stuck giving their business to a natural monopoly. Of course, as mentioned, the natural monopoly is there because customers don't have any such choice. But thanks to innovations over the past few decades, these high barriers to entry are increasingly tumbling down.
This rise of new choices is providing a tangible benefit for consumers who are adopting cleantech and related innovations.
Most people frame "cleantech" in terms of cleaner vs. dirtier, or around incumbent vs. upstart costs. But to me, the dynamic driving real customer adoption of these innovations is simply giving customers a choice where before they never had one.
Why is this such a big deal? Because the markets populated by such natural monopolies (large parts of energy, water, food and transportation) are worth trillions of dollars, are rife with inefficiencies, and are under threat from smart entrepreneurs with new types of strategies to reach customers. When natural monopolies lose their status, it can unlock massive economic shifts in favor of those entrepreneurs.
The biggest example right now, of course, is Uber. What started out as a way to order a black car on your iPhone has become a lower-cost alternative to taxis. Uber, Lyft, Sidecar and others are now often preferred by riders because of convenience and a better experience -- and increasingly, because of lower cost, although most didn't start with that advantage.
It's annoyingly cliche to describe an energy startup as being "the Amazon for X" or "the Uber for Y." But making these comparisons reveals a deeper truth about entrenched industries confronted with new competition, thanks to ubiquitous distributed hardware and "software eating the world," as Marc Andreessen described it a few years back.
We can already see how this will happen in electricity, thanks to the rise of the behind-the-meter microgrid (i.e.,solar+ intelligent load control + storage). This doesn't have to be a complete consumer defection in order for utilities to feel the impact. Just allowing customers to be slightly more self-sufficient is already starting to have major impacts on the industry -- as illustrated by all the urgent "utility of the future" conversations that are now underway.
But it's not just in transportation and electricity. This can happen in almost any geography-based natural monopoly. Thanks to automation and embedded intelligence, resource innovations at the small scale help make distributed assets cost-competitive with old "economies of scale" centralized production models. Look for this to happen next in distributed food production techniques, distributed water treatment or perhaps distributed fuel production via local waste-to-fuel.
This isn't solely a cleantech dynamic. The rise of internet-distributed content is doing the same thing to old content-distribution oligopolies (e.g., cable or dish). But because of the physical and geographic factors, it's a really acute trend in resource innovations.
Distributed offerings -- either in media, food or energy -- give consumers much greater choice. And, naturally, consumers love this.
However, it's a trend mostly untapped in resource-related markets. There's no real reason for that. The solutions look a lot like what strategies today's IT entrepreneurs are applying in other sectors -- small, intelligent hardware and web-based services/sharing/apps. In many cases, no huge new technological innovations are necessary to start putting together winning solutions. Entrepreneurs just need to decide to tackle these "boring" disruption opportunities, instead of attempting the latest in an increasingly long line of video-sharing apps.
So pick your least favorite natural monopoly -- and go disrupt it. Bring customers new choices, and they will eagerly embrace them.