Is Big Tech Hyper Competitive or Anti Competitive?
A look at various example of hyper/anti competitive behavior.
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If you had a chance to watch or read about the recent antitrust hearings one of the things that you would have noticed is that companies that have an advantage are highly competitive and have built strong moats. These moats allow them to offer subsidized, lower, bundled, or free pricing leading to new entrants finding it really hard to enter or compete in that market. In some cases the incumbent/stronger company wins and in some cases the entrant/weaker company wins. Sometimes these “gates” (how the company makes money) can be broken down by a smart enough entrant. Entrants to the ecosystem are generally on way weaker footing and have to play the game until they win, give in, or find a new gate or business model. I find this quite fascinating and the idea of this article is to provide a list of interesting David v. Goliath type situations and analyze some of these examples (if there isn’t a winner yet) to see who is likely to win and if I think there is an antitrust issue. As you read this article the question to ask is : Is this company’s behavior anticompetitive (illegal) or just hypercompetitive? (not illegal)? What does that mean? Ben Thompson has aptly defined these terms in Apple, Epic, and the App Store:
This is, admittedly, a distinction I have not seen before, but it is perhaps a useful one, for the simple reason that being a successful business by definition means being anticompetitive: without some sort of differentiation and/or superior cost structure any sort of margin a business has will be competed away, and so preserving that differentiation and/or cost structure — being anticompetitive — should be the goal of any business. The distinction Callahan was drawing, though, is necessary if you interpret “anticompetitive” as being “illegal”: businesses should compete, but they should not break the law along the way.
What makes this distinction particularly challenging is that the question as to what is anticompetitive and what is simply good business changes as a business scales. A small business can generally be as anticompetitive as it wants to be, while a much larger business is much more constrained in how anticompetitively it can act (as a quick aside, for the first part of this essay I am painting in broad strokes as far as questions of specific legality go).
OK so let's get into a few of these examples:
Facebook v. NY Times
Who’s winning? NYTimes, though Facebook really doesn’t care either way.
Gate : Facebook makes money from ad’s and a feed unit is fungible (mostly). NY Times created their own gate with subs and weaned off FB traffic over time.
Is Facebook’s behavior anticompetitive in this case? NO!
For a publisher it's a damned if you do, damned if you don't. They can publish to Facebook but there is really no competitive advantage. By putting the gate at ad’s Facebook pretty much ignored, injured/killed, ruined and then called truce with publishers.
From NYTimes
“We feel acute responsibility because there’s obviously an awareness that the internet has disrupted the news industry business model,” Mark Zuckerberg, Facebook’s chief executive, said in an interview. “We’ve figured out a different way to do this that we think is going to be better and more sustainable.”
Facebook will pay for a range of content from dozens of publishers — including striking some deals well into the millions of dollars — and get local news from smaller publishers in metropolitan markets like Dallas-Fort Worth, Miami and Atlanta.
“Mark Zuckerberg seems personally and professionally committed to ensuring that high-quality journalism has a viable, valued future,” Robert Thomson, chief executive of News Corporation, said in a statement. “It is absolutely appropriate that premium journalism is recognized and rewarded.”
The smartest of these publishers are , for example, The Information, NY Times, and individual bloggers such as Ben Thompson, who is so popular, that I need not even bother linking to Stratechery. The key lesson here is know who you are competing against, have a solid product offering. People will pay for good news. Now and always.
Side note : A recent iOS development on news links for News+ publishers that will prevent the actual news website to open but open the link within News+. By default!
However NYT (and several other news outlets) are doing their own thing and have refused to participate. See this video from Tony Haile
From Apple News+ in iOS 14 Opens Article Web Links in Apple News, Intercepting Traffic From Websites
The New York Times and The Washington Post have refused to participate in Apple News+, as have many other news sites. The New York Times recently ended its Apple News partnership entirely and pulled all articles from the service, stating that Apple News does not "align with its strategy of building direct relationships with paying readers."
Slack v. MSFT Teams
Who’s winning? : MSFT Teams
Gate : MSFT can easily bundle. Slack can’t. Slack does not have anything that can be bundled today. Also the gate is habits. User habits with Office 365/Office and other MSFT products.
Is MSFT’s bundling behavior anticompetitive? Unlikely that this behavior is anticompetitive unless Slack can effectively prove that MSFT blocks them in some way, which I don’t think MSFT is doing
Slack recently filed a complaint against MSFT which I covered here. The fact of the matter is that MSFT can afford to give aways Teams for free because they make money from a variety of other sources and giving away teams for free with a “bundled” offering doesn't affect them financially. MSFT owns prime real estate with Email, Office, and their host of collaboration tools (both on-prem and off-prem) and thus MSFT has large structural advantages, large teams of salespeople, VARs, enterprise relationships. It will be hard for Slack to catch up and even with a (currently) substandard offering, MSFT will win.
What can Slack do? Slack can potentially partner with a company such as Notion and Zoom to improve their position and bundle price with extremely deep integrations. This is initially a Bizdev problem, then becomes an integration/seamless problem and finally becomes a revshare problem. In other words. HARD. The most palatable option for Slack is to sell (or acquire) another company. The other option which they are pursuing is Slack Connect which is a longer term play
GSuite v. Zoom
Gate : GSuite has the eyeballs and the real estate.
Who’s winning? : Unknown, but defaults matter and Google Meet is free for 60m calls.
Is Gsuite’s behavior anticompetitive? Probably not but this will definitely piss users off in the long run
Google Cloud and GSuite haven’t aced collaboration yet but by virtue of having 2 billion gSuite (gmail) accounts they own prime real estate. All this is free. Comes along with “Smart Compose”, GDocs… and now comes with a LARGE button for Google Meet
Furthermore from Google: G Suite now has 2 billion users:
"That's a staggering number," Soltero boasted. "These products have incredible reach. Changing the way people work is something we are uniquely positioned to do."
The milestone firms up G Suite's position as the main rival to Microsoft Office 365. However, Microsoft still dominates the commercial market.
G Suite includes Gmail, Calendar, Docs and Sheets, Drive, Hangouts, and Meet.
When Google raised prices for G Suite at the beginning of last year, it said it had four million businesses using G Suite in 2018. Google charges $6 per month per user for G Suite Basic, $12 a month per user for G Suite Business, and $25 per user a month for G Suite Enterprise.
This essentially spells a lot of trouble for Zoom and Google has an upcoming host of features -see : Updates in G Suite unify contacts, content, and tasks in Gmail so you can make the most of your time.
Amazon v. Merchants
Who’s winning? : Amazon
Gate : Users/Prime/Free shipping. Merchants want access to a lucrative user base. Pay the price.
Is this anticompetitive? Likely, yes but proving this will be hard!
Merchants are subservient to Amazon who owns all the demand, buy-box placement and customers love free shipping. Plus there is also the issue of whether Amazon actually looks at 3P merchant data internally to decide what products to private-label
From Amazon’s tollbooth it is clear that Amazon is pocketing more for Prime, Buybox placement of products, FBA etc.
Amazon keeps an average of 30 percent of each sale made by independent sellers on its site, up from 19 percent just five years ago
Amazon is extracting more from sellers by tying their ability to generate sales on its site to their willingness to buy additional Amazon services, including its fulfillment and advertising services.
Amazon’s high fees make it nearly impossible for sellers to sustain a profitable business. Most fail. Yet Amazon has no risk of running out of sellers; its monopoly ensures there’s an endless stream of people, both here and abroad, willing to try.
Amazon has leveraged its captive base of sellers to build a dominant logistics business. It’s now delivering half of the items ordered on its site and a growing share of those purchased on other sites. Amazon has already overtaken the U.S. Postal Service in the large e-commerce parcel market, and it’s expected to surpass UPS and FedEx by 2022.
Amazon’s revenue from seller fees has grown so large that sellers are effectively cross-subsidizing Amazon’s retail division. Last year, seller fees covered more than three-quarters of Amazon’s total shipping and fulfillment expenses, including the costs of operating its warehouses, providing customer service, and processing payments.
The policy solution to Amazon’s exploitation of its gatekeeper power must be twofold. First, its marketplace platform should be subject to public utility-like standards of non-discrimination and fair pricing. Second, its various divisions must be spun off into separate companies to eliminate conflicts of interest and monopoly leveraging.
Google Search v. Safari on iOS
Who’s winning? : Apple and Google. Every other search engine company that can’t pay for the privilege loses (DuckDuckGo, Edge, Opera, Vivaldi, Brave)
Gate : Defaults matter and by cornering the default on both iOS and Android Google wins.
Is this anticompetitive : Unlikely; that's like saying a property in Palo Alto can’t be sold for more than $1M (now there’s a dream!)
The default browser on iOS is Safari and Apple doesn’t allow you to change that (yet, though there are rumors that iOS 14 will allow this). By virtue of being the default browser on iOS and being a desirable target device for wealthier users Google pays Apple handsomely for the privilege of being the default search engine.
Side note Google pays Mozilla about $400-450M to be the default search provider and that is 90% of their revenue. Get this : If Google stops paying Mozilla, Mozilla is uh, dead! So Google is actually helping the competitor stay alive. Think about this for a second. Why doesn’t Google just not pay Mozilla and uh, kill them? Two possibilities
They’d cry foul. Google pays Safari, why not us?
Bing might be happy to pay for that privilege.
Google Search/Assistant v. Samsung
Who’s winning? : Google probably. Alexa loses and Bixby too. Did I hear you say Cortana? Sorry Cortana just morphed into Clippy’s elder brother!
Gate : Valuable voice defaults on Samsung’s devices (and Play services)
Recent news about Google and Samsung indicates that Google is going to take over more tasks on Samsung which is quite odd honestly since Samsung has its own products; nevertheless this is probably a good deal for Samsung if they can eke out the a similar TAC that Apple does from Google
From Google in Talks to Take Over More Search Tasks on Samsung Phones
The talks involve giving Google more control over search on Samsung handsets globally. Samsung is the largest smartphone maker in the world, selling close to 300 million phones last year. Google’s Android is already the underlying operating system on Galaxy devices, but a potential deal would promote Google’s digital assistant and Play Store for apps on those devices, details from a person briefed on the matter show.
As a side note, remember that any device manufactured had to sign and adhere to the Mobile Application Distribution Agreement (MADA) which was leaked in 2014. In 2018 after a $5b EU antitrust fine Google made favorable changes which allows a device maker to “fork” Android and still be able to access “Google Play Services” and “Google Play Store” (in other words a default browser can be anything). This is of course applicable to EU but could also be a reason that Google is partnering with Samsung
If you want the Play Store, Google Maps, Gmail, and all the other Google apps you need to make a viable commercial smartphone, though, you need to talk to Google and sign a MADA, which comes with a ton of restrictions.
The last time we saw a MADA document (back in 2014), it had an "anti-fragmentation" clause, which said that any company signing the agreement has to be all-in on Google's Android. If you produced any Android device without Google's apps, you got booted from the Google ecosystem. This means that a company like Amazon, which makes forked Kindle devices, could never ship a smartphone with Google apps.
App stores v. Spotify, Epic Games, Hey! and everyone else!
Who’s winning? : Apple App Store. By charging 30% and enforcing rules that no 3rd party payment methods are allowed, they make it hard for Spotify to compete on price. This website has a timeline.
Gate : App Store as the entry point for a developer; controlled by hardware
Anticompetitive : Yes! Likely
There is a lot of coverage of this ongoing battle. I am in complete agreement that “sideloading” apps is not a good idea (even though Google allows this). The problem is that Apple doesn’t allow the developer to integrate any payment methods that subvert its own payment mechanism. How exactly does this protect users? It doesn’t! This is just Apple unjustly flexing its muscle. I think a fair compromise is for Apple to allow for alternative payment options for apps where they compete (Apple Music, Arcade for example) but this will set a bad precedent.
From the Epic games v/s Apple lawsuit (which it looks like Epic will lose) :
The final count referencing the Sherman Act is over Apple “tying the App Store in the iOS App Distribution Market to In-App Purchase in the iOS In-App Payment Processing Market” — effectively creating what Epic sees as a monopoly harming competition and causing harm to consumers through inflated pricing. (The complaint also accuses Apple of three counts of violating the California Cartwright Act, a state antitrust law prohibiting price-fixing and trade restraint agreements, and one count of violating California Unfair Competition Law.) Epic is able to make the pricing argument because it specifically lowered prices on its in-game Fortnite currency when it implemented its own payment processing system, saying it was passing the savings onto consumers in what is now a clear ploy to paint Apple’s decision as anti-consumer.
Facebook v. TikTok
Who’s winning? : Larger players that have the $ such as TikTok, smaller player who can’t afford large ad campaign/app install campaign budgets
Gate : VC Dollars
Anticompetitive : If Facebook did stop TikTok from advertising (see below) would that be anticompetitive? I don’t think so. If I owned a restaurant and you came to my restaurant and told me that you have a better restaurant across and I should visit would that be anticompetitive?
The Margins on TikTok’s paid acquisition talks about how TikTok used Facebook as an acquisition channel to grow. TikTok was of course well capitalized so that made it palatable for them. Furthermore, Facebook could have locked them out at any time, therefore preemptively killing their growth.
According to data from the ad and apps analytics company Sensor Tower, TikTok quickly rose to be the #1 share of voice in their measurement analytics of Facebook Ads in Q1 and Q2 of 2018. Reuters reported that “nearly 22% of all ads seen by U.S. Apple device users on Facebook ad network came from TikTok and its Chinese counterpart Douyin” while Bloomberg noted in 2019 “13 percent of all the ads seen by users of Facebook’s Android app were for TikTok.”
But in mid-2019, that focus on Facebook ads began to drop off, and TikTok dropped from the #1 to the #40th app install advertisers, according to Adweek. As Reuters cited,
The rise of TikTok as a U.S. competitor should be held up as a cautionary tale. Only once their technology was perfected and they were armed with billions of dollars to spend on advertising, could TikTok attempt to enter the U.S. market. Then TikTok had to spend billions of dollars on competitors’ platforms in order to achieve viability, and access could have been blocked as the competitive threat grew. TikTok could do this because they grew in the huge and sheltered Chinese market and could import that technology and revenue into the U.S., an example of the global competition that Big Tech companies often cite. Yet at home, almost no new U.S. company could ever meet these conditions today.
Also side note on Facebook’s Patriotism stand. From Tech Monopolies Are the Reason the US Now Has a TikTok Problem.
Curiously, Facebook didn’t do that with TikTok. In fact, it did the opposite. During the spring and summer of 2018, when Facebook was still pushing to access China and trying to open a subsidiary office in Hangzhou, Facebook allowed the Chinese app to blitzkrieg its site with advertising. The ad buys were so overwhelming—more than a billion dollars—that between 15 percent and 22 percent of all ads shown through Facebook on IOS during this time were TikTok ads.
Sonos v. Amazon Echo
Who’s winning? : Amazon Echo can subsidize the devices. They have multiple other places where they make money
Gate : Prime, Shopping, AWS
Anticompetitive : Likely, Yes (pricing below cost)
From : Sonos CEO says Amazon is breaking the law by selling Echo smart speakers below cost
Sonos CEO Patrick Spence believes that Amazon is breaking the law by selling its Echo speakers below cost. "That's predatory pricing," Spence told Protocol on Wednesday. His comments came in response to last week's Big Tech hearing, which included Amazon CEO Jeff Bezos' first appearance on Capitol Hill.
During the hearing, Bezos was asked by Rep. Jamie Raskin whether Amazon priced the Echo speaker below cost. "Not its list price, but it's often on promotion," Bezos responded, adding: "And sometimes when it's on promotion, it may be below cost, yes."
"That's illegal," Spence said Wednesday. He argued that companies like Amazon and Google are only able to engage in these kinds of price wars because of their ability to make up for losses from hardware sales. "They just take money from their monopoly business, they just subsidize, subsidize, subsidize," he said.
Apple Ad Networks v. Mobile Advertisers (in iOS14 beta, which may change)
Who’s winning? : Apple’s Ad Networks
Gate : App Permissions/OS Ownership
Anticompetitive : Unlikely since its related to privacy
The issue here is simple. Apple is getting rid of IDFA which is “Identifier for Advertisers” You know when you get followed on the web? See a pair of shoes somewhere, see an ad for them again! That is courtesy of the IDFA. In and of itself Apple killing the IDFA in favor of privacy is not an issue; the potential issue is that Apple does not have to adhere to this since they own the OS. The IDFA is used to measure marketing and if I click on ad’s show me more else stop - thereby saving the advertiser on advertising $. If Apple has better targeted advertising because users don’t want to click a scary looking popup (see below) then Apple Search Ad’s (v/s all other App Install Ad’s) could have an advantage
For Apple (on by default)
For other apps (this is scary sh*t)
Some historical examples that hit close to home (when I was a DB Eng.)
Oracle and mySQL
Who won? Oracle won finally but mySQL was a huge threat
Relational databases have always been expensive. Expensive hardware to run them and expensive DBA’s to maintain the whole thing. Remember a DB is just a datastore and back then (prior to Sun getting acquired by Oracle) there were not that many choices. So Oracle made hay while the sun shone. MySQL was a free and open source DB which generally formed part of what was known then as the poor man’s on-prem LAMP stack (Linux, Apache, MySQL, PHP) -- all free. When Oracle acquired Sun, they promised to keep mySQL open source, which they did. They just didn’t bother keeping the bianries up to date and a lot of new DB’s (relational and otherwise) were created. Oracle effectively killed mySQL.
MySQL is free and open-source software under the terms of the GNU General Public License, and is also available under a variety of proprietary licenses. MySQL was owned and sponsored by the Swedish company MySQL AB, which was bought by Sun Microsystems (now Oracle Corporation).In 2010, when Oracle acquired Sun, Widenius forked the open-source MySQL project to create MariaDB.
mySQL made money via a dual licensing model which allowed them to make money for proprietary licenses. What is dual licensing?
Dual licensing usually refers to licensing software under both a proprietary license and an open source license, typically the GPL. While this may seem like a conflicting approach, it has become a popular means by which licensors gain the economic benefits associated with commercial licensing while leveraging the community benefits associated with open source licensing.
Sun Solaris v. Redhat Linux
Who won? Redhat Linux
Redhat Linux came bundled with support at a fraction of a cost to what Solaris SPARC (hardware) plus Solaris OS cost. With run-of-the-mill x86 boxes one could be up and running but similar to Big Blue back in the day no one got fired for buying Solaris + Oracle but Red Hat Commercial Linux (and Red Hat Enterprise Linux later) neutralized that. Redhat effectively changed the gate .. and the game!
There are many examples of hyper competitive behavior; after all the United States is a capitalist economy. What is interesting is given how large tech has become generally, I think we’ll see more and more of these cases come to light. The lens to look at these would have to change. The questions one should ask are:
Is this fair?
Does this lead to bad consumer outcomes? In the short run? In the long run?
Does this kill competition unfairly?
And finally is this anti-competitive?
Ultimately, what is likely to happen is there will be some form of regulation that will try to address each of these situations; some will become law and some of the above behavior will become anti-competitive in the future. Don’t hold your breath, it will be a while.
Thank you for reading. Stay safe, be well!