In 1819, Supreme Court Chief Justice John Marshall penned the famous phrase, “the power to tax involves the power to destroy.” This insightful commentary came as part of the Court’s ruling in the case of McCulloch v. Maryland. The case involved a move by the State of Maryland to favor in-state banks by taxing the bank notes of the federally chartered Bank of the United States. In a unanimous decision, the Court ruled that Maryland couldn’t try to run the federal bank out of town through clever tax schemes.
This famous phrase pops into my head every time I see data and software companies get too arrogant or too greedy and start to abuse their market dominance. This is because software and data companies that dominate their markets have some of the same coercive power as governments with their ability to make rules and set prices.
I got a direct taste of this earlier in the week when an email arrived from QuickBooks to tell me that they were more or less doubling my annual subscription fee. The rationale for this massive increase? The folks at Intuit (parent company of QuickBooks) feel they work very hard and deserve more money. You may recall that Intuit has recently been hard at work with its fleet of lobbyists trying to get legislation passed to prohibit the IRS from offering an online tax filing service. In its annual report, Intuit specifically calls out the threat of federal and state “encroachment” on its business. A touch of entitlement, perhaps?
My email from QuickBooks was followed by an email from DropBox announcing a 20% price increase. At least DropBox doubled my online storage in exchange, not that I really needed it.
It’s not just in the software industry where market power is being abused. As just one example, StreetEasy, the dominant real estate listing platform in New York City, stopped accepting automated listings feeds from several major real estate brokers in a fit of arrogance and competitive gamesmanship. Try not to laugh when you read StreetEasy’s justification for suspending automated feeds:
“Sending a feed sounds simple and seamless. It’s not. Continuing to receive listings in such an inefficient way wasn’t doing anyone — agents or consumers — any favors. So, we innovated.”
StreetEasy’s innovation? Data entry screens that require brokers to re-enter all their listings … manually. You can’t make this stuff up.
Often what damages or even kills great data and software companies with dominant market positions is the abuse of their market power. They forget why they exist and who the customer is. In many cases they get lazy, finding it easier to raise prices than continuing to innovate. Sometimes these companies impose big price increases, as in the case of QuickBooks, simply because they can.
Market dominance creates coercive power that can destroy. With taxation, the party that can be destroyed is the taxpayer. But with private companies, coercive power comes with the ability to destroy … themselves.