From “kill-zones” to “waterbeds,” the giants of the digital marketplace have ways of making you squirm.
By Napoleon LINARTHATOS
If we manage not to descend into some kind of tech dystopia, then the generations that come after us will have the opportunity to wonder how on earth we had been duped for so long and so pathetically by a few Big Tech monopolists, how it was possible to have such a grand accumulation of power and wealth preserved by a system so bluntly corrupt in its modus operandi. Were we so transfixed by the shiny digital objects as to be oblivious to what was going on around us? Were we so keen on bludgeoning each other online as to allow the man behind the curtain to carry on?
The 2020 House report on competition in digital markets was damning in its content but feeble in its consequences, and the reason may be found within the report. At some point a particularly abusive tactic of Amazon is noted. Jeff Bezos, the Amazon oligarch, is shocked, as Captain Renault in the movie Casablanca, that such an abusive practice has been deployed by his company. “That is unacceptable” Bezos declares, “and I will look into that, and we’ll get back to your office with that.” Then the congressional report indicates that “to date, however, Amazon has not followed up with the Subcommittee to provide additional information.” Pooh-poohing Congress is possible when you know that your monopoly is relatively safe, and that the investigation will more likely end up as a performative political dance around the issue.
This, by the way, was not an isolated incident. The subcommittee had found that, in general, Amazon used the counterfeit products on its platform as leverage in order to force businesses to sell on its platform. Internally, those businesses were classified as “holdouts.” Even a large corporation like Nike had to cave in. Wall Street Journal reported that “Nike agreed to start selling some products directly to Amazon in exchange for stricter policing of counterfeits and restrictions on unsanctioned sales, according to a person familiar with the deal.”
Of course, leveraging its sales of counterfeits is only one of the ways that Amazon forces businesses across America to bend to its will. Amazon uses the data from the sales made by those businesses in order to discover opportunities and consumer trends for its private label, Amazon Basics. A former Amazon employee testified that his peers “were pulling private data on Amazon seller activity, so they could figure out market opportunity, etc. Totally not legitimate, but no one monitored or seemed to care.” Besides, a lot of data from third party sellers could be used in accordance with Amazon policies because significant loopholes exist in those policies.
Lina Khan, recently appointed to the Federal Trade Commission, has documented the case of Quidsi, once “one of the world’s fastest growing e-commerce companies.” Quidsi was very successful selling many different products through its subsidiaries, like Diapers.com. Amazon wanted to buy Quidsi back in 2009 but the founders of the company declined. It was then that Amazon used its size, reach, and financial heft to start a price war against Quidsi.
Quidsi executives saw that Amazon’s pricing bots—software “that carefully monitors other companies’ prices and adjusts Amazon’s to match”—were tracking Diapers.com and would immediately slash Amazon’s prices in response to Quidsi’s changes. In September 2010, Amazon rolled out Amazon Mom, a new service that offered a year’s worth of free two-day Prime shipping (which usually cost $79 a year). Customers could also secure an additional 30% discount on diapers by signing up for monthly deliveries as part of a service known as “Subscribe and Save.”
It was not long before Quidsi was sold to Amazon for $545 million.
According to the congressional report, Amazon had identified Quidsi as its “#1 short term competitor” and “was willing to bleed over $200 million in losses in diapers in one month.” Since the acquisition of Quidsi, Amazon has significantly reduced the discounts and the benefits of the Amazon Mom service.
There are the network effects around social products and a finite number of different social mechanics to invent. Once someone wins at a specific mechanic, it’s difficult for others to supplant them without doing something different. It’s possible someone beats Instagram by building something that is better to the point that they get network migration, but this is harder as long as Instagram keeps running as a product.
In a recent cover story of Barron’s, Instagram was presented as “the most important component of Facebook” from the investor’s point of view. “Its growth would surely get a higher multiple than the core Facebook platform business.” In a similar fashion, Instagram could achieve for Facebook what the YouTube acquisition had done for Google. “Even amid the pandemic, YouTube ad sales jumped 31% in 2020, easily outpacing the 6% growth from Google Search ads. Alphabet’s stock has returned 40% since the first YouTube disclosure, versus 24% for the S&P 500.” It is a pretty reasonable development when you realize that the giants of Big Tech contain within themselves so many of their would-be competitors.
Instagram for Facebook, Waze and YouTube for Google, Quidsi for Amazon, these are acquisitions in which at least the acquired party got to survive. Nowadays, it is more likely for a startup to be destroyed either by being cloned by the Big Tech, crashed by its predatory pricing, or just being bought in order to be shut down. “American tech giants are making life tough for startups” the Economist reported. “Big, rich and paranoid, they have reams of data to help them spot and buy young firms that might challenge them.” Startups like the giants are beginning to look like a bad investment. “Anything having to do with the consumer internet is perceived as dangerous, because of the dominance of Amazon, Facebook and Google (owned by Alphabet). Venture capitalists are wary of backing startups in online search, social media, mobile and e-commerce.” There is a weariness in the startups world, according to the Economist, about entering what is called a kill-zone—a military term meaning an area of engagement with a concentration of fatalities: “Snap is the most prominent example; after Snap rebuffed Facebook’s attempts to buy the firm in 2013, for $3bn, Facebook cloned many of its successful features and has put a damper on its growth.”
A paper by economists Ufuk Akcigit and Sina Ates argued that “the US economy has witnessed a number of striking trends that indicate rising market concentration and a slowdown in business dynamism in recent decades.” Presenting “new evidence on higher concentration of patenting in the hands of firms with the largest stock that corroborates declining knowledge diffusion in the economy.” In the year 2017, Facebook and Google captured “an astounding 99% of revenue growth from digital advertising in the US.” Thus, though astonishing, it is no surprise that, “due to Google and Facebook’s dominance, ‘the average growth rate for every other company in the sector was close to 0’.”
This month it was the turn of Tile, a company that produces tracking devices, to feel the kill-zone heat from the Big Tech giants. Apple introduced its own tracking device, the AirTag. There was a lot of fanboy-journalism coverage about the new product. On Bloomberg, the CEO of Tile, C.J. Prober, said
If you look at the history between Tile and Apple, we had a very symbiotic relationship. They sold Tile in their stores, we were highlighted at WWDC 2019, and then they launched Find My in 2019, and right when they launched their Find My app, which is effectively a competitor of Tile, they made a number of changes to their OS that made it very difficult for our customers to enable Tile. And then once they got it enabled, they started showing notifications that basically made it seem like Tile was broken.
The Tile devices are not broken. But in the Apple ecosystem the Tile devices need to be broken because that is what Apple decided. Competition and free markets are kind of broken, though, as the increasingly grim record of the adjacent tech monopolies is demonstrating. Previously, as Amazon was a big client of delivery companies like UPS, it was estimated that it was able to get discounts up to 70 percent “over regular delivery prices. Delivery companies sought to make up for the discounts they gave to Amazon by raising the prices they charged to independent sellers, a phenomenon recently termed the ‘waterbed effect.’” Big Tech has been getting huge discounts—economic, social and political—from America for some time now. The waterbed, having been subjected to extreme point pressures, is about to pop.