At a time when politicians in Washington DC cannot agree on almost anything, it is ironic that the one issue they all agree on is to attack the very companies that generate the most benefits: Big Tech. Following President Biden’s appointment of legal scholar and tech critic Lina Khan to be chairperson of the Federal Trade Commission (FTC) in March 2021, Biden signed an executive order on July 9 urging the FTC to establish rules on large platforms’ use of surveillance and gathering of user data and to create rules “barring unfair methods of competition” that could harm smaller businesses. This follows congressional hearings last August in which both Democrats and Republicans piled attack after attack on the four CEOs of Big Tech.
The Benefits Of The Digital Giants
CNBC commentator Jim Cramer spoke for many on July 8 when he “kindly and politely asked the politicians around the world to stop doing more harm than good, maybe support businesses that work and stop attacking them; maybe stop shaking down winners and go after the bad actors instead.”
It is sometimes hard to recall amid the bipartisan venom now directed at Big Tech that these firms have become big precisely because they have lavished benefits on us all. In just two decades, digital firms have helped make it easier and simpler and quicker for us to work, to communicate, to get about, to shop, to play and watch games, to get health care and education, to raise our children, to entertain ourselves, to read, to listen to music, to watch theater and movies, to worship, in short, to live. Former corporate giants IBM or GE were no match for the digital giants and are in decline precisely because they failed to deliver such benefits, despite their use of the same digital technology.(See Figure 1)
Digital Giants Became Big Because They Are Run Differently
The digital giants won in the marketplace not only through digital technology but also by creating value in different ways. Instead of an industrial-era focus on internal efficiency and outputs, the primary preoccupation in digital is external: an obsession with creating value and outcomes for customers and users. Instead of starting from what the firm could produce that might be sold to customers, digital firms work backwards from what customers needed and then saw how that might be delivered in a sustainable way. Instead of leadership located solely at the top, leadership that create fresh value is encouraged throughout the organization. Instead of tight control of individuals reporting to bosses, self-organizing teams throughout the organization create value by drawing on their own talents and imagination. Instead of the steep hierarchies of authority of industrial era-firms, digital firms tend to be organized in horizontal networks of competence. In this way, the central management concepts of the industrial era have been upended.
Firms that were being run in an industrial-era manner like IBM or practicing “innovation theater” like GE were no match for digital giants. It was like a fight between knives and automatic rifles. When firms use the new ways of creating value, they can move more quickly, operate more efficiently, mobilize more resources, attract more talent and use it more effectively, win over customers more readily, enjoy more elevated market capitalizations, and have ample resources to protect their gains by lobbying regulators. Network effects enable digital winners to keep getting bigger, while once-dominant industrial-era firms continue to sputter. If private and public sector organizations do not retire the management practices of the industrial era, they risk declining into irrelevance or disappearing entirely.
Bigness Is Inherent In The Digital Age
We are living in a new economic age—the age of digital—and digital giants are an emblem of this fact. They reflect the immense benefits and revenue that digital can generate, in the exponential growth that digital enables and in the competitive threat they represent to traditionally managed firms.
Bigness is an inherent in the digital economy. “In markets with highly scalable assets,” write Haskell and Westlake write in Capitalism Without Capital, (Princeton, 2017) “the rewards for runners-up are often meager. If Google’s search algorithm is the best and is almost infinitely scalable, why use Yahoo’s? Winner-takes-all scenarios are likely to be the norm.” Breaking up Google into ten little Googles, requiring users to go to a different little Googles for different kinds of searches, would destroy much of the ease and convenience of Google.
Lina Kahn’s Yale Law Review Article
The new FTC chair, Lina Khan, came to public attention through her 2017 student article “Amazon’s Antitrust Paradox” in the Yale Law Review, which assails bigness as inherently bad and an indication that the firms must have done something wrong. What such critics may be missing the inherent tendency of the digital economy towards winner-take-all.
Kahn’s article also tends to ignore the extent of competition among Big Tech. For many purposes, Wikipedia is a more reliable source of many kinds of knowledge than Google. Amazon and Google battle each other in search. There is no final placement: the game is ongoing.
Kahn’s article attacks Amazon for having a long-term strategy of innovation, and a willingness to forgo short-term profits for long term returns. Such criticisms are bizarre at a time when most big firms are too much focused on the short-term, and using share-buybacks to reward their shareholders and executives, to make up for a lack of real growth or innovation, at serious cost to customers and society.
Repeal of SEC rule 10B-18, introduced in 1982, which has led directly to rampant short-termism, income inequality, and self-dealing by executives is a much more urgent task than trying to right-size Big Tech. Let’s be clear: investing in innovation and value creation are good. It’s failure to innovate, and value extraction, that are bad.
The Flaws Of Big Tech
Still, Big Tech is not flawless. The Wall Street Journal has documented cases where Amazon allegedly used its insider knowledge gained from operating the platform to compete against its own partners in areas such diapers, furniture, camera and tripods.
Big Tech would be wiser to refrain from winning every conflict in the marketplace. “Consider the alternative case of Alibaba, China’s answer to Amazon as a one-stop shopping destination,” suggests business Professor Julian Birkinshaw. “Unlike Amazon, Alibaba doesn’t make its own products, and therefore it doesn’t compete with its own suppliers… Alibaba deliberately passes up some short-term money-making opportunities to help its pursuit of longer-term growth.”
Options For Big Tech
Big Tech faces two main options. They can go on acting as if nothing is amiss and hope that government action will take a long time to become a reality. Or they can take proactive steps to regulate themselves with a renewed commitment to “act honorably” and “do no evil”. The latter course of action will be the smarter and less painful one. Regulation is coming: the only question is whether the big four will do it for themselves or have it done to them.
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