Big tech CEOs are under fire for their market power. At a time when the country is not united about much, we watched the executives of Amazon, Facebook, Apple, and Google face hostility from both sides of the aisle. It turns out that tech monopolies are one foe upon which we all agree.
In venture capital, we know the issues well. Our startups compete in a landscape dominated by these incumbents. In one view, the startup ecosystem benefits from the role these giants play. Startups build off the technologies they spin out. Venture investors reinvest the capital incumbents provide when they acquire successful startups.
The other view is less rosy. This perspective recognizes that market concentration is a dampener on innovation. Venture capitalists are less likely to fund startups that compete against monopolies’ core products. There is a name for this: Innovation kill zones.
Innovation kill zones are real. Try pitching a venture firm on your new search engine. Or how about that ad network you have dreamt up. You get the idea. Big tech has moats that entrench their market power. These moats drive down the odds of funding a startup that competes against them.
As a startup investor, I see this often. For example, I will meet yet another founder who wants to disrupt Microsoft’s LinkedIn. They will have a clever plan to build a better professional social network. I always pass on the investment. It is nearly impossible to overcome the monopoly LinkedIn enjoys. It is but one example of an innovation kill zone.
The entrenchment of big tech has worsened. The five largest domestic companies by market value are Apple, Microsoft, Amazon, Google, and Facebook. Combined they represent 18% of the total market value of the United States stock market. In a clear signal of their market power, they operate with gross profit margins between four to eight times the S&P 500 average.
In the twentieth century, the United States led on antitrust. We ensured that we had competitive free markets. But we can no longer claim this. Europe adopted the United States’ regulatory model and has kept truer to it than we have. For the last twenty years, Europe has taken the lead in creating competitive markets.
Competition requires free entry of new competitors. A company competes not only with existing firms but with upstarts building better products and approaches. You do not have robust free-market competition without this. This innovation drives the American economy. Without free entry into markets, innovation grinds to a halt.
The solution is to restore the free entry by startups. The Department of Justice and Federal Trade Commission must root out kill zones so that startup innovation can thrive. These agencies have both the authority and the support of the country to do so.
In some cases, this could involve traditional breakups. Breakups, though, are an old frame for thinking about antitrust. With technology companies, breakups risk the double sin of doing too much and not enough—too much by degrading tech products’ integrated consumer experiences; too little when a breakup leaves behind the same problems we seek to fix. Splitting Facebook into parts replaces one entrenched data monopoly with several.
There is a better remedy. It is to create data portability, open standards, and interoperability for their monopoly products. The data pools these companies hold are their most valuable assets. Our government needs to build the pipes into their moats.
How could that look? Imagine third-party app stores. Apple would certify compliance for security, ethics, and privacy. If Apple did not act in good faith, the Federal Trade Commission could oversee certification. The App Store, with its hefty 30% revenue toll on the entire app ecosystem, would have to compete on price and services. Imagine the same approach forcing Facebook to open its social graph. Competitors would interoperate with Facebook the same as Instagram and WhatsApp do today.
There are efforts underway that deserve support. The Data Transfer Project is a voluntary collaboration by some of these companies to respond to these criticisms. It is laudable but it is not an industry-wide effort. Nor is it satisfactory in its results so far. Meanwhile in Congress, the bipartisan-sponsored ACCESS Act would force data portability and interoperability.
These changes would open the gates to true competition. Innovation would thrive as entrepreneurs unleash their creative energies. New experiences and products would emerge in social media, search, app delivery, commerce, and so on. The economy and consumers will be the winners.
Note : I spoke about this on a panel with the DOJ antitrust leadership earlier this year. I argued that the DOJ should increase their antitrust scrutiny of big-tech to foster innovation. Ram Sriram, Roger McNamee, and Susan Woodward were part of the discussion. The WSJ, FT, Wired, Protocol, and Axios covered it.