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A mega example of contestability

Jonny Clark

20th January 2013

Students taking their Business Economics unit exams might like to use online file-storage as an example of a contestable market. This comes during the week of an announcement by the colourfully-named internet tycoon Kim Dotcom of a re-launch of his file-sharing cloud-site Mega - which offers up to 50 Gb of free file storage and out-trumps its big and more established competitors at Dropbox, Microsoft and Google. According to Mr Dotcom he already has a quarter of a million registered users and over a million hits on his website within the first day.

There is no such thing as a perfectly contestable market but the online file-storage ticks quite a few of the boxes in terms of being highly contestable:

  1. Low barriers of entry - the most significant barrier Mr Dotcom faces is a legal one. His previous website Megaupload was closed down by international government authorities claiming that it was predominantly used for file-sharing of illegally copied music and movie media. He'll have to prove that the new website isn't blighted by the same activity. Other than that, the set up costs are relatively low and the market is too youthful to have a hugely brand-loyal customer base.
  2. Access to technology - the fact that a non-US based internet company can gain such a large following so quickly shows the relative ease of setting up a business of this nature and attracting a large customer base in a short period of time - all thanks to the wonder of playing-field-leveling internet.
  3. Low sunk costs - no doubt most of the hardware used by Mega is the same set of servers used by Megaupload and, should Mr Dotcom fall foul of the authorities again and have to quickly shut down I'm sure the same pieces of kit can be easily transferred to another company probably without even moving their location.

Good luck to all students taking exams this week - I hope your results are Mega.

Jonny Clark

Jon Clark has been teaching economics and business studies for over 25 years primarily in the Further Education sector. Before joining tutor2u, he was a senior manager at South Cheshire College in Crewe.

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