Monopoly in AEC: The Issues and Economics
Lina Khan and others are going after Big Tech's outsized power, anticompetitive leverage, and inappropriate political interference in the markets it touches. Now may be the appropriate time to think about monopoly power in AEC.
GOVERNMENTS WORLDWIDE HAVE BIG TECH in their cross-hairs regarding antitrust issues. What happens in these ensuring legal battles may spill over to sectors like the AEC industry and its tech giants. Yet, this article today isn't explicitly aimed at speculating how that could take shape. Nor is it aimed at claiming there is a monopolist in AEC or that a natural monopoly would be best for the economic performance of the BIM industry.
Instead, the focus is more general and exploratory than that—looking at the tendency towards concentration (natural monopoly) more broadly within the present context of the AEC industry.
Architecture (Industry in Crisis)
Today the AEC industry is at a pivotal inflection point in its history. Within that inflection point, the field of Architecture is arguably facing its most extensive set of challenges ever.
The root of those challenges is often firmly economic. On the one hand, nothing has fundamentally changed in the field since I have been in it (from 1983 to the present) regarding the architect's belief that they deserve better fees. Whether talking to one of Boston's most prominent firms or reading the tales and tribulations of architects in a Facebook group devoted to practice, the gripes about appreciation and remuneration remain the same. Architects don't make enough money.
And why is that?
In February 1994, shortly after a US economic recession, Progressive Architecture magazine ran a cover feature titled, "Can This Profession Be Saved?" On the cover was a picture of actor Gary Cooper as Howard Roark in The Fountainhead. Ayan Rand's famous novel about a hero architect needs little introduction to this audience. But it serves as a reminder that the Architecture industry's biggest enemy may be itself.
The Architecture profession (industry) saw itself in dire condition in the early 90s after the post-Reaganomics US recession. Most of the pressing issues in 1994 still remain today, if not in amplified format. Yet today's architects must find their new way in an AEC industry facing Industry 4.0 industrial transformation.
On top of the image of Howard Roark lies a chart listing the dramatic uptick and downtick of architectural employment from the mid-70s to the mid-90s. Of course, it peaked in the late 80s then crashed by the early 90s. (see image below)
Architects today face all the same issues noted in the 1994 Progressive story. They still face—the whack of recessions, the eroding client base, the loss of professional turf, and the waning of professionalism. All of those old issues still linger. Some are even worse.
Architects—Technology, Monopoly, and Economics
Combine those lingering issues with the massive disruption of Industry 4.0. The field of Architecture will either save itself over the next decade or lose itself to something considerably less significant than the field is even today.
"But Antitrust doctrine views low consumer prices, alone, to be evidence of sound competition. This analysis reveals that the current frameworks in antitrust—specifically equating competition with 'consumer welfare,' typically measured through short-term effects on price and output—fails to capture the architecture of market power in the twenty-first-century marketplace."
Before outlining the remainder of this article, it is worth pointing out that the digital revolution did little to address the field's root economic viability issues. It also did not, or could not, solve its cultural issues (e.g., the waning of professionalism).
Architects are not alone in under-leveraging the digital revolution. The entire AEC industry has lagged just about every other industry on Earth in productivity gains over the past 30 years. (see: The Economist, "The construction industry's productivity problem," 17 August 2017)
Despite the power of computers, software, and the power of the Internet, the AEC industry's real gross value added per hour worked has grown at a quarter of the rate of manufacturing. And this is hardly a construction-sided issue. Any decades-long experienced architect will tell you today that the AEC industry still faces the same fundamental problems it faced three decades ago. (see No 4 in our Top Reads in this issue, specifically AIA report link). There hasn't been commensurate dramatic acceleration or productivity gains like in the world of manufacturing, for example.
So what is the role of monopoly in this discussion?
In the remainder of this article—which is more of a shared research note—I will outline the currently hot topic of monopoly (or big tech monopoly) and its impact on the issues and economics of the AEC industry.
Each subtopic under monopoly will be briefly explored. In the future, Xpresso and Architosh will publish expansive articles that dive deeper. Here is a brief outline of what remains below:
- Big Tech and Anti-Trust: A New Context
- AEC: On the Natural Monopoly Path?
- Network Effects vs. Core Innovation
- Cultural Issues and the Academy
Generally, people think of monopolies as always bad for society, but this is false. The very concept of monopoly is ever-changing and currently under pressure to change due to Big Tech's rise, power, and political influence.
Big Tech and Anti-Trust: A New Context
Much of the current political zeal for reviewing Big Tech for antitrust issues stems from recent political debates and competitor complaints (e.g., Apple's fight with Epic Games). However, Yale Law grad Lina Kahn's high-profile paper entitled "Amazon's Antitrust Paradox" galvanized antitrust thinking and landed her the FTC chair position in the Biden Administration.
Her famous self-defined Note points out that current antitrust frameworks are inadequate for the twenty-first century. "Antitrust doctrine views low consumer prices, alone, to be evidence of sound competition," she writes. However, "this analysis reveals that the current frameworks in antitrust—specifically its equating competition with "consumer welfare," typically measured through short-term effects on price and output—fails to capture the architecture of market power in the twenty-first-century marketplace."
The AEC industry's technology leaders should not exempt themselves from the new antitrust efforts making big waves in Congress and the Biden Administration. FTC chair Lina Khan's groundbreaking paper on Amazon exemplified the gaps and fitness of current antitrust legal doctrine. While aimed at consumer-level Big Tech (Amazon, Apple, Google, Meta, Microsoft), new legislation could impact industrial sector leaders.
She argues that gauging real competition in the current century—"especially in the case of online platforms—requires analyzing the underlying structure and dynamics of markets."
When we compare AEC to manufacturing and look at the productivity lag between these two 'building things' industries, we might ask how each industry has embraced digital technologies? What impact did that have on the underlying structure of AEC versus manufacturing?
Both industries utilize CAD technologies, yet their relative productivity performances are starkly different. A proper analysis of AEC versus manufacturing would look at other critical differences between the sectors beyond the more competitive and plural nature of the digital tools serving the MCAD industry versus the AEC industry.
"At a minimum, it is fair to ask how the consumer tendency in AEC to migrate towards a natural monopoly may contribute (or not) to both innovation and technology adoption."
For example, AEC is incredibly fragmented compared to manufacturing. And it is more cyclical, which The Economist article points out contributes to less capital investment.
There is no single dominant CAD technology company or de facto industry standard in the manufacturing world. Whereas, in the AEC industry, especially in the United States, a single company's solutions have enjoyed two phases of a de facto status. At a minimum, it is fair to ask how the consumer tendency in AEC to migrate towards a natural monopoly may contribute (or not) to both innovation creation and technology adoption.
At the same time, as more AEC software technologies move online, prominent AEC software players may approach "platform" status as defined by the big platforms in Big Tech.
For years, Amazon, Apple, Google, and Meta have been in the crosshairs of antitrust-concerned politicians like Senator Elizabeth Warren. New legislation is titled Ending Platform Monopolies Act (now renamed American Choice and Innovation Online Act). It was officially introduced in the House this month. The new legislation aimed at Big Tech may end up curtailing innovation not just at the level of Big Tech but at the market leaders in industry verticals like AEC.
AEC: On the Natural Monopoly Path?
Not all monopolies are of the same type. Nor are they always bad for society and economic performance. (see: Investopedia: "A History of U.S. Monopolies," 7 Oct 2021). Examples of previous natural monopolies include telephone and railway systems. The question of whether software companies can be natural monopolies is also debated.
When an industry involves the build-out of infrastructure that is economically best served by a single large company, a natural monopoly may emerge. The concept is that "the efficiency of a certain market requires that it be provided by fewer rather than many" competitors. Natural monopolies arise in industries that require unique or specific materials, technology, or other factors to operate at peak efficiency.
When uniformity of communication technology (as in the telephone business) or transportation technology (railroads business) is more efficient to deploy and scale out just one standard, powerful economies of scale emerge to shape the industry towards a natural monopoly.
It has been argued that Microsoft Windows is a natural monopoly. The operating system is a type of "common" infrastructure, like rail tracks or telephone line infrastructure. For example, with the telephone, "all phones need to be connected and work together to attain the highest benefit."
The underlying principle behind a natural software monopoly is that software is much more efficient with uniformity. Uniformity takes several forms, including that one system is required to learn. Another benefit of natural software monopolies is that they provide economies of scale that smaller competitors cannot match. In the case of platforms (both operating systems and extensible software systems like CAD systems), the greater the number of users, the more valuable the application tends to be to its end users.
"As the BIM transformation continues to expand in AEC it is worth asking the question does this industry tend towards a natural monopoly due to intrinsic efficiencies in the underlying technical structure of the BIM transformation or does it tend in that direction due to false assumptions, and non-economic decision-making?"
Before we talk about "network effects," it is worth noting that in the past, the US government allowed a natural monopoly to exist to the point where it has built out the industry, only to break up the natural monopolist later.
As the BIM transformation continues to expand in AEC it is worth asking the question does this industry tend towards a natural monopoly due to intrinsic efficiencies in the underlying technical structure of the BIM transformation or does it tend in that direction due to false assumptions, and non-economic decision-making?
When Microsoft Windows was at its peak power a common assumption was that it would parlay its success on the desktop to any next-generation device. As history would show, it failed to even succeed with a simple portable music device and failed humiliatingly to succeed in the smartphone market. The big takeaway from Microsoft's failure is that the power of a natural monopolist cannot be assumed to easily benefit tangential new markets.
History shows that despite 90 percent plus desktop market share dominance, Microsoft was less innovative and brought less efficiency to the computer industry in new emerging areas that would be better served, as it would turn out, by companies such as Google, Apple, Blackberry, and open consortium groups like the Khronos Group with OpenGL technology. The market ended up with innovative browsers, search, smartphones, and foundational 3D technology that would enable software developers (games in particular) to deliver greater value across a growing sea of new mobile device types.
The Architecture profession today deserves to be scrutinized for its contribution to the AEC industry's paltry productivity gains worldwide. In the United States, data from McKinsey shows the US AEC industry lagging behind other advanced economies like Germany, Japan, and France. This despite more unification of digital technologies in the US market.
The AEC BIM industry in the United States and some other countries tend towards unification in BIM technologies, just as the industry in decades before tended toward unity around 2D CAD technologies. Greater access to a source of competency in digital tools, greater access to support resources like training materials, and data/CAD interoperability led to the factors steering the industry toward concentration around a single technology solution.
So if the United States AEC market, in particular, tended more naturally to reap the advantages of a natural monopoly why did the country's building industry fair worse than rival rich countries like Germany and Japan? (see: The Economist, "The construction industry's productivity problem," 17 Aug 2017). Those two countries especially are more pluralized with digital technologies in their markets. While Japan's capitalism is grounded in a partnering culture known in Japanese as keiretsu enterprises, (see: Architosh, "Why one of Apple's most notable developers is winning big in Japan," 29 Mar 2014), Germany's socialist capitalism is dominated by the German Mittelstand, benefitting from small and medium businesses that are highly specialized and world-leading.
There are complex factors that can explain the AEC US market's lagging nature in productivity indices. Do these other factors (in countries like Japan and Germany) greatly over-power the yielding benefits of software concentration and unity?
We might also ask if the AEC industry is spending and deploying enough digital technologies to make a difference? AEC industry firms spend about 1.5 - 3.5 percent of revenues on digital technologies. Should this be much higher to yield productivity gains equal to other similar industries?
Network Effects vs. Core Innovation
I will mention the industry cultural pressures in AEC that have contributed to the rise of natural monopolies in AEC in the final subsection below. Critically, however, when users tend towards the market leader—due to benefits associated with "network effects" (real or imagined)—they fundamentally assume the value of economic benefits from network effects are greater than the value of economic benefits from core innovation in the smaller rival product.
For example, when a user selected AutoCAD for their architecture firm in the 1990s over, say, Microstation, they believed that uniformity benefits (like a larger body of users who knew AutoCAD versus training users to learn Microstation) produced an economic benefit (saving on training) that outweighed any economic benefits from Microstation's core innovation advantages.
Likewise, when users selected Microstation instead and went against the grain of the industry, they believed the inverse was true for them.
As rationale as that might sound, the profound truth is that end-users make non-economic choices (psychological decisions) in the guise of rational business thinking all the time. Remember the old saying that nobody got fired for hiring IBM? That is an example of a psychological decision (fear of being fired), not an economic one.
"I've been saying since I finished undergrad, at least, is that essentially you have a workplace and a profession that was very much designed not for women, around a very particular traditional kind of household setup."
The sad truth is that only a side-by-side comparison with sound economic measurement methods could guide a valid economic basis for selecting a software system. Such comparisons are few and far between and the industry lacks professional or academic literature devoted to the economic measurement of digital technologies.
Even more troubling is that some CAD software systems are more favorable than rivals depending on building type, workflow, and design process (styles of working.) Some CAD and BIM systems have specialized around building types or sub-sectors in the industry (e.g., BIM tools for landscape and urban design professionals).
The notion that the AEC industry tends toward supporting natural monopoly because of assumptions around network effects—despite these facts—is a red flag worth waving in the industry.
Cultural Issues and the Academy
This article began by noting that the Architecture industry is facing significant new challenges. Those challenges are primarily economic at their root cause. As a key segment of the AEC industry, architecture firms play a key role in the AEC industry's dismal productivity, and real gross value added compared to the total economy on average. According to McKinsey, no industry has done worse.
Now Architecture is facing new turbulence in the form of unionization movements in the United States. Millennials and GenZ architects will show the industry that they will not tolerate horrific long hours and low wages like previous generations. And the issue is more than just economics; the unionization movement is fundamentally about gender equality and inclusivity in the profession.
The Architecture industry's longstanding and economically self-wounding compulsive work culture seems almost designed intentionally to eliminate women from the profession. But what it really does is devalue the economic productivity variable of "time" and dis-encourages scrutiny of processes and technologies—especially measured ones. This has contributed to the false assumption that Architecture is a calling, not a profession. Meanwhile, the engineering and construction industries see themselves firmly as for-profit professions. (Image: Commons Edge)
The fundamentally poor or unbalanced economics of the profession significantly impacts women architects. In a field with notorious compulsive work culture ethics, long hours in architecture firms are especially damaging to women with children. Boston Society of Architects (BSA) President, Anda French AIA, says in this interview, "I've been saying since I finished undergrad, at least, is that essentially you have a workplace and a profession that was very much designed not for women, around a very particular traditional kind of household setup."
Why do architecture firms require architects to work late into the evenings so much and on weekends? Hasn't the transition to digital technologies helped speed up the processes and deliverables?
The answer is yes and no. And the broader problems of economic underperformance in the field stem from Architecture culture, which begins in school. There is fundamentally a disrespect for the value of time. The architecture studio encourages poor time management, bad working habits, and a cultural devaluation of professionalism (i.e., being a responsible adult, not treating the studio experience like a teen sleep-over).
At the Academy, young architects learn their first and most damaging economic lesson: working through the night is noble.
Then they learn their second most damaging economic lesson: architecture schools don't teach much in the way of business, economics, or innovation. Without BEI instruction, architects are ill-equipped to change the profession for the better, much less recognize the patterns that perpetuate the dysfunction. This is a chilling unspoken message for a profession fraught with such existential challenges.
Rather than unionize, young architects should demand they be educated in business, economics, and innovation (BEI coursework) specifically framed to help them solve the very economic challenges historically facing the profession as well as the high-tech challenges and disruption confronting AEC's transformation.
So how does Architecture culture contribute to tending towards concentration? Simple: Architects are under immense pressure to learn too many things and schools teach market-leading apps so they can help their grads land jobs in firms. This sets up a mindset in young architects that discourages critical economic-based thinking about how digital technologies can economically transform and disrupt practice.
In Conclusion—Where To Go From Here?
The set of challenges facing the Architecture industry is both broad and deep. This article opens a line of inquiry about the relationships between digital technologies and the field's adoption patterns and economic results or outputs. It especially identifies how the United States market has tended toward a winner-takes-all market dynamic. This framework asks the following questions (organized by subtopic):
On Antitrust and Big Tech —
If new antitrust legislation on "platform" companies disrupts the larger tech market, how might that impact the AEC industry?
What are the critical differences between how the manufacturing industry has adopted CAD technologies versus AEC, and how has that affected the underlying dynamics and market structure, and vice versa?
On AEC on a Natural Monopoly Path —
Would AEC be most efficiently served by a single company...perhaps regulated? Is the industry possessing a technology that is more like an "infrastructure" for communication and transport [of data] that should be common and unifying?
Why has manufacturing excelled above average in generating productivity value gains while AEC has done so poorly? Could our tendency toward natural monopoly actually be harming the economics of the industry?
On Network Effects versus Core Innovation —
Why do AEC industry firms make so many assumptions about the economic benefits of network effects? Why not actually measure them in comparison to core innovations?
Where is the generation of a body of research data on digital technologies and their economic impacts in AEC? Why does it not exist?
On Cultural Issues and the Academy —
How can the Academy go unaccounted for within the context of unionization efforts in Architecture? How can the devaluation of time continue in studio culture in the Academy while pushing for more inclusivity in Architecture—especially for women?
How can the Architecture field reinvent itself without instruction in business, economics, and innovation? Isn't the Academy's role preparing practitioners for the industry's future?
Alan Kay from XEROX Parc, and later Apple, famously said that the best way to predict the future is to invent it. The Progressive Architecture article mentioned earlier ends by saying: "What is difficult about this moment in the history of the profession is that the field is moving in so many different directions at once."
That was 1994. Back then, nobody could have imagined the acceleration of change happening today. The industry needs to understand that it has a configuration problem that may stem from how it has adopted or not adopted digital technology. At the same time, antitrust movers-and-shakers like Lina Khan recognize that Big Tech may have a monopoly problem. We may learn from the analysis of Khan and others that so does AEC.
In the meantime, this article opens up several related lines of inquiry that deserve far deeper and more penetrating research. This article marks a start for us at Architosh.