The National Affairs symposium on regulating big tech has a piece on market power that did not address the issue that most concerns me. The authors are basically arguing that no matter how badly the tech firms behave, government intervention can and probably will make things worse.
What concerns me is the way that the big tech firms do not seem to engage in narrow specialization. Instead, they have become conglomerates. Facebook buys Oculus. Google buys YouTube. Amazon buys Whole Foods. And so on.
Why is this happening? Some possibilities.
1. It is an artifact of our financial system. Wall Street funnels enormous amounts of capital to the big names, so that everyone else faces the choice of being bought out or getting trampled. If YouTube had not sold to Google, Google might have bought someone else (Vimeo?) and buried YouTube.
2. Market specialization is no longer such a thing. What tech firms specialize in nowadays is hiring and managing software engineers and knowing what markets to tackle next. There is so much “learning by doing” in fast-growth management that by the time you see a firm that has made it big, it has acquired skills that can be thrown at many different problems. If a firm has survived the process of going from start-up to big success, it has a great team and highly refined management processes. With that going for you, and access to the nearly unlimited funding that venture capital and Wall Street can provide, you can get into almost any market you want.
Another possible factor, potentially overlapping with your (2):
On the internet, there’s increasing returns to scale in information. Once you get big enough, you have enough information to gain an edge in knowing what the most attractive new markets will be, what the most complementary existing markets are, and optimizing a strategy for succeeding in both.
Note, A complement may simply be a complement in the type of information it generates.
“On the internet, there’s increasing returns to scale in information.”
That’s true, and it has bid implications for the “calculation problem”.
The calculation problem is an argument against socialism that says a central planner can’t do better than decentralized information aggregation and communications systems like prices and markets in terms of allocating resources and making efficient decisions about production.
However, the argument relies on what at the time and until now were completely realistic assumptions about the limits of technical capabilities, surveillance, predictive algorithms, and so forth. In the limit you can ask whether an individual can be the best central planner for a population of 1 – himself – having uniquely privileged access to information about himself, but dealing with uncertainties in the “outside world” over which he lacks control.
But it seems to be possible to watch individuals closely enough, in groups that are large enough, and to establish patterns of human psychology and reaction that are accurate enough, to have, if not god-like omniscience, maybe as close as it is possible to get, to “know someone better than he knows himself” (cf: “He that searcheth the hearts knoweth what is the mind of the spirit”.)
There is Andreessen’s line, “Software is eating the world”, which is about the ability to bring world-class IT capabilities to quickly cause a quantum leap improvement in certain lines of business which have been sitting at stagnating levels of efficiency and productivity.
Where I work is not representative of the typical corporate world, but there is so much obviously low-hanging fruit ripe for aggressive attempts at automation that it’s kind of terrifying and of course just a matter of time.
But think of the situation of, say, Travel Agents (remember those?) who would actually get paid middle-class wages commissions to buy you plane tickets! Or stock brokers, before cheap electronic trading, and what would be real estate agents today, still only a little bit disrupted because of successful rent-seeking.
There was a time when these jobs were dead by the people still doing them just didn’t know it yet. Because they were going to get eaten by software which could do the same things automatically, at negligible marginal cost and practically unlimited ability to scale up.
If you’ve got a great “Software Monster Building Machine”, you can set it’s targeting sights on practically anything and have your machine build a monster of software that is going to eat up that low-hanging fruit too. If only a few organizations in the world can do this at world-class levels, they are going to use their huge financial war chests to try and use their software monsters to gobble everything up.
And I think “surveillance is eating the world” is the second part of this, and there seem to be huge economies of scale to successful tracking and correlating of devices and identities, and only a handful of entities are able to pull it off.
a central planner can’t do better than decentralized information aggregation and communications systems
What’s “better” ?
Better for society as a whole?
Is better for society as a whole if Facebook sells my private information collected through the use of their platform, and I decide to keep using Facebook because I don’t want to be the only one left out?
I think it only contradicts the calculation problem depending on your definition of better.
Other possible candidates:
(1.) Founder hubris.
(2.) Tax avoidance.
(3.) Excuse to not pay dividends.
(4.) It’s easier for managers to load up debt on an acquisition, sell off assets to pay themselves big compensation, then leave the acquisition teetering on the edge of bankruptcy. Mitt Romney’s Bain Capital pattern of practice.
(5.) Outside pressure from investment fund managers. Say a manager at Blackrock has a buddy with a green energy start-up or the like, Blackrock can “encourage” a firm to acquire the start-up as part of “corporate social responsibility” thereby covering the patent violations of fiduciary responsibility to the retirement accounts and other investors in Blackrock just in case the SEC snaps out of its coma.
(6.) Anti-competitive keiretsu building. Builds stability by locking customers into a web of products.
(7.) An acquisition protects under performing incumbent management by increasing the risk associated with any internal accountability moves and focusing attention on the acquired firms management.
(8.). The race to acquire “too big to fail “ status.
(9.). Size increases political power and increases lobbying ROI as well as increasing the ability to intimidate politicians.
(10.) Conglomerates frequently achieve global status and are thereby freed from concern for home country welfare.
Imteresting. But keep in mind that Google tried to compete with Facebook with its Google+ and failed. Also, young people have moved on to competitors like snap chat.
Great reminder of Snapchat. NOT my age target. Great Fast Company note.
He refused a $3 bln buyout offer from Mark at Facebook in 2013.
Was down. Came back.
https://www.fastcompany.com/90457684/snap-most-innovative-companies-2020
I work on a smallish team at a big tech company. Another reason for conglomerates are returns to shared infrastructure, not just physical but primarily software: build systems, integration testing frameworks, data flow computing systems, distributed file systems, etc. A lot of this has been becoming availabile as open source and from cloud providers in the last decade or so, but there’s still a huge difference between picking up a set of integrated solutions supported by dedicated in house teams and cobbling something together from external offerings. These are the real economies of scale in contemporary information technology. For many services they’re more important than the more widely discussed network effects.
One of the common characteristics of folks at these companies (not only founders but motivated and committed lower level employees) is the conviction that basically every area of life can be improved by better software design. This is coupled to a sense of urgency to make that improvement and a sense that “people like us” are smarter and more insightful than others about how to make the improvement.
This gives rise to a very broad variety of ambitious development efforts, especially when the first few efforts succeed brilliantly and increase one’s confidence in having found a general purpose better way to build things. “If only we could apply the Google touch to X” becomes a tempting thought for many X.
Another manifestation of this is the tendency of these companies to build tools for themselves in-house which most other similarly situated companies would outsource. When management dictates that a cheaper outsourced solution be used instead employees will often complain bitterly that it isn’t tailored to their expectations the way the in-house version was.
Your examples were once the next big thing, and they are keenly aware that there will be more next big things.
They will essientally spend any amount to try to ensure that the next big thing will be their thing and not someone else’s.
Will it be VR? Online groceries? A new social network? Who knows?
1. If we buy it and it flops, we wasted some money—no big deal
2. If we buy it and it’s huge, we get even richer
3. If we don’t buy it and it’s huge, it’s an existential threat
+1 to xoogler.
Another contributing factor may be that these companies are (to varying degrees) highly trusted brands and are likely to quickly gain some market share.
Amazon’s customer service is amazing, and so I’m happy to see them over into other areas. I can get delivery from Whole Foods without paying nearly as much as Instacart charged me and if the order is messed up it is credited to my account with no questions asked. As soon as Amazon got into the pharmacy business I willingly signed up because of its reputation of great customer service.
Companies like Amazon know this and so these are growth opportunities. If anything, I wished these companies moved faster.
I’d love to pay Google $70/mo for Google Fiber, and have an Amazon Fresh store locally in which the worst part of the shopping experience (checking out) is done automatically.
I want Apple to buy Nintendo (maybe not wise at current valuations but eventually) and combine its two biggest motivating factors (making money hand over fist and providing great value) to help unlock all of that great Nintendo IP.
That seems to be the case. Which is why exceptions to it surprise me so much. Small independent companies who take over an entire space, while all the big conglomerates to beat them and fail. Spotify. You’d think Apple and Google or Amazon would be able to offer something more convincing.
Zoom too.. how is it that Amazon (with their web services), Microsoft, or Google can’t beat Zoom? Don’t get me started on Teams.
The metawork prowess at the big conglomerates can potentially erode from within the core too, if they centeralize the decision making or product development too much. So I’m saying that the big tech giants aren’t untouchable.
Big conglomerates suck at dynamism and will fail in these more agile spaces. Imagine a product that needs to evolve very dynamically and quickly. Like Tik Tok… Instagram’s attempts at competing feel like a grandpa trying to do a backflip. At best no one gets hurt, but it’s still very cringy to watch.
Make the data and ID Auth portable by law. Enforce interoperability. But this is too simple a solution. No place for the bureaucratic intervention like in case of anti trust. No wonder it’s not pursued.
My hypothesis:
1) Corporate management is strongly incentivized to increase share prices.
2) Current prices for equity assume high profit growth (also low interest rates and low inflation)
3) When management knows that it can’t grow fast enough to please the market, buying a faster-growing company is an obvious strategy.
3a) It has to be a largish company, relative to the buyer. Buying a small company or starting a side project won’t bring in enough money fast enough. No mouse can grow fast enough to keep a tiger fed.
3b) Managers tend to have informed understandings of the limits of their own markets, but can be more optimistic about markets they’re less familiar with.
4) Pursuing this strategy creates a conglomerate.
I don’t think you or your commenters follow tech much, so most of this is way off, with the exception of Roger and Aidin’s skepticism. The truth is that these tech “conglomerates” fail horribly at almost everything they try after their initial success. For example, Amazon’s attempt to get into smartphones in 2014, hardly a cutting-edge tech market at the time, was one of the all-time disasters.
I would say instead that each of them found a gusher, what the oil industry calls a giant find, and then because of aggressive management and the nature of software, which can be quickly scaled up to grab giant market share, they became tech giants fairly quickly.
In google’s case, the gusher was replacing a bunch of disparate physical products once used to look up information, everything from the phone book to Rand McNally maps to the local library, with the online search engine, a networked cloud of computer servers that stocked that info for you instead, making money through ads relevant to your search requests.
For facebook, the gusher was replacing the newspaper, the family newsletter, and personal letters/email/texts with their suite of social sharing products, including Instagram and Whatsapp, making money through ads relevant to your likes.
It is an interesting question if those founders were merely lucky to find those gushers, or whether their talents and aggression mattered much. I’d guess that lucking into the gusher was much more important but their personal talents certainly contributed too, maybe 20-30% of the reason they rode that gusher.
However, to suggest they’re just very competent and succeed at everything else too is to be deeply ignorant of their many inevitable failures when they stray from their initial success. When you can throw billions from your initial tech monopoly at a host of other failing businesses, you can simply keep them alive longer than most.
The Dems hate the Big Tech success stories because of success. The Reps are starting to hate Big Tech because of actual anti-conservative bias, in practice.
Big Tech has succeeded, wildly, in buying out most potential competitors like WhatsApp, YouTube, Instagram – so that what would have become choice giving alternatives become part of the bigger conglomerate. Which continues being good at buying upcomers.
The ease of selling a successful “unicorn” has likely helped VC folk found more internet experiments, increasing consumer welfare fast.
But there’s some reasonable argument that Big Tech, in censoring the Hunter Biden corruption story before the election, “thru” the election to Joe Biden, who might well soon be in deeper corruption investigations than Trump was in.
They were quite successful, along with Dem media, at censoring that news. Many Reps now, and likely more in the future as it becomes more clear how much censorship there was, will be in favor of break-up now, even if we Reps disagree on how and why the Dems do it.
Were the founders were merely lucky to find those gushers, or whether their talents and aggression mattered much. In Google’s case, it was clear tech superiority in the known gusher of Search – far better than Alto Vista, or Excite (both with Palo Alto – Stanford founders), or Yahoo, or any other search engine. Superior theory – not quite luck. But luckily combined with great engineering. Yes, some luck. Amazon was more like Microsoft, small improvements and mostly avoiding costly mistakes early. Facebook was most lucky – MySpace wasn’t good enough.
Mafia Wars and other Facebook games helped boost its early popularity and lucky timing. Not everything, but very important.
Break ’em up now, special for these “too big” and too not fair for now. The internet, and the world, will be better for it.
Yes, Google was definitely a sustaining innovation (and how!). They got their ad business right too.
Good comment. I guess the lesson to entrepreneurs is to not diversify too soon. Stay with the gusher.