Friday, November 25, 2022

Silicon Sultans as gatekeepers and controlling innovation

I published a post titled 'Robber Barons & Silicon Sultans: Rockefeller vs Bezos' on February 20.

The original robber barons operated in the Rhine valley, as the river had been Europe’s principal highway for 1,000 years. In the decades after the US Civil War, the American robber barons were industrialists and financiers who amassed huge fortunes by monopolizing key industries by forming trusts and engaging in unethical business practices including fraud.

Today the Big Tech gatekeepers are Apple; Microsoft; Alphabet (Google); Amazon and Meta (Facebook). They operate in most of the world with the main exception being China.

Big Tech firms spent $603bn (Amazon spent $242bn) on innovation in the 11 years 2010-2020 but they also limit competition including copying promising work by young innovators or acquiring them.

Facebook for example copied Snapchat's features after the Snapchat founders rejected Zuckerberg's offer to acquire the site.

In 2021 revenues of the 5 firms were at $1.4tn.

Researchers at the University of Chicago Booth School of Business have said that when a startup was bought by Google or Facebook, VC (venture capital) investments in the same space dropped by 46% in the following three years, and the number of deals by 42%.

In a small market such as Ireland, most tech startup owners likely wish to be acquired and if there is greater ambition, their VC backers would pressure them to welcome an American acquisition.

The Irish government shouldn't fund the charade that Ireland can become a tech innovation centre powered by large successful indigenous firms.

Academics, Ariel Ezrachi and Maurice E. Stucke, in their new book 'How Big-Tech Barons Smash Innovation―and How to Strike Back (HarperCollins 2022),' say "we explore the means through which a few big tech firms, in controlling significant ecosystems, distort the paths of innovation and undermine disruption, to safeguard their own value chains. While these Tech Barons promote innovations that support their ecosystems, they quash disruption that threatens their profit models. And, as they control significant access points to markets, their strategies effectively distort the future paths of innovation and diminish its plurality.

"How so? Among the tools they have (which earlier monopolies lacked) is the nowcasting radar. Tech Barons can identify market patterns within their ecosystems and neutralize innovation threats. Facebook, for example, acquired the data-security app Onavo to track users’ smartphone activity. That technology was central in its acquisitions of perceived competitive threats, including WhatsApp. With a clear view of risks beyond the horizons, the Tech Barons can engage in strategies aimed at distorting the supply of disruptive innovation. This includes, as our book discusses, their many weapons to exclude disruptors from their ecosystem. In speaking with disruptive innovators, we chronicle the toll on innovation when Tech Barons refuse access, reduce interoperability, copy technologies to deprive disruptors of the scale necessary to survive, restrict disruptors’ access to long-term funding, and, of course, acquire these disruptors."

The Federal Trade Commission (FTC) revealed in 2021 that Apple, Facebook, Amazon, Google and Microsoft between January 2010 and December 2019 made 819 acquisitions that were not registered as they failed to meet reporting requirements. Apart from the size of the transaction, other exemptions may include cross-border deals in which the buyer is not acquiring control.

Big Tech has disclosed about 800 acquisitions over the years. The actual number is at least double that.

Google has for example acquired key startups since going public in 2004. See here and here.

Startups and Big Tech

Lina Khan, chairperson of the FTC, said in relation to the study that Big Tech companies systemically used acquisitions of startups to eliminate future competitors: “[The study] captures the extent to which these firms have devoted tremendous resources to acquiring startups, patent portfolios and entire teams of technologists — and how they were able to do so largely outside of our purview,” said Khan.

Deals below the $92m limit were on a high in 2021 year according to Refinitiv data, with $66bn spent on buying assets in this size category, through 8,451 transactions (that number — up 35% from a year earlier.

The FTC report said Apple, Facebook, Amazon, Google and Microsoft made 616 acquisitions valued at more than $1mn, with more than 75% of the young firms founders and key staff required to sign non-compete clauses. At least 40% of the deals involved companies that were less than five years old.

Over 10,000 tech startups bought by bigger firms in 2021

Baker McKenzie, an international law firm said this year that the technology sector dominated M&A (Mergers and acquisitions) in 2021, setting records in deal value and volume. Technology M&A in 2021 increased by 71% from 2020 levels, with dealmaking totalling USD$1.1tn and accounting for 20% of all global M&A deal value. Deal volume also soared, increasing 34% compared to the previous year’s numbers.

The decline in US employer startups

The number of employer startups (the lower line on the chart above) in the United States has fallen since 1994.

Data from US government agencies show that while the US population grew 26% from 263mn in 1994-2019, employer startups added only 21,000 firms. The number employed fell from 2.05mn to 1.70mn in 2019. Startup firms of less than 1 year old had 5 employees in 1994. In the year ended March 2019, the startup firms had 4 employees on average.

According to the Census Bureau after falling in the 1980s, the share of employment at more mature firms (from 6 years old) rose steadily, representing approximately 90% of all employees by 2019.

"The Information sector trended somewhat away from older firms through the tech crash in the early 2000’s but has risen since and is now nearly 95% concentrated in mature firms.

The large and increasing presence of employment at old firms appears to contradict the notion that young startups are the engine of economic growth. However, it is true that young firms are more dynamic and have much greater rates of net job creation.

The Net Job Creation Rate (NJCR) indicates how many more jobs were created than were destroyed relative to overall employment in an industry.

The job creation rate is notably higher for young firms than for old ones — the NJCR has hovered around 15% to 20% for younger firms throughout the time series but was roughly 0% and often negative for more established firms."

In the year ended in March 2019, large older firms and the smallest startup firms contributed more than other age and size categories to the total job gains. Firms older than 10 years and with more than 500 employees contributed the most to job gains; these firms recorded over 3.5mn job gains. Meanwhile, startup firms with 1 to 4 employees recorded over 800,000 job gains.

The Bureau of Labor Statistics noted "In the year ended in March 2019, employment in firms with 10 years or more in business made up 86% of total private sector employment. The startup firms of less than 1 year old had 1% of total employment but contributed 90% of the employment growth."

The Information sector failure rate in the US is about 21% after 1 year and 52% after 5 years.

On average across OECD countries (mainly Advanced Countries according to the IMF) and over years, young firms account for about 20% of employment but create almost half of new jobs

Business dynamism has been declining in most OECD countries and industries, and the most dynamic sectors – typically the digital-intensive ones – have experienced the largest decline.

The OECD says transformational entrepreneurs’ startups (high growth firms) – on average 4% of all micro startups – create between 22% (the Netherlands) and 53% (France) of new jobs.

Entrepreneurship falls as reliance on high-growth firms rises

Discussion

The American military has a long history with technology firms. For example industries in Santa Clara, California, had a key role in Cold War military developments according to Thomas Heinrich, a German-born American academic.

"Santa Clara County produced all of the United States Navy's intercontinental ballistic missiles, the bulk of its reconnaissance satellites and tracking systems, and a wide range of microelectronics that became integral components of high-tech weapons and weapons systems. Aircraft like the F-16 tactical fighter could not fly, much less engage in combat, without the transistors, integrated circuits, and microprocessors that collected and processed flight data linked the plane to external command, control, and communications systems, and guided "smart" bombs and missiles to their targets. Benefits were not one-sided."

What became known as Silicon Valley, derived considerable revenues from defence contracting.

The US Pentagon launched DAPRA (Defense Advanced Research Projects Agency) in 1957. DARPA's ARPANET network for sharing digital resources among geographically separated computers had an initial demonstration in 1969 that led to the development Internet.

Besides the development of the Internet, the Global Positioning System (GPS) which is still owned by the US government, allowed civilian access from the 1980s to the satellites that are operated by the Air Force. The GPS is free and has been a boon for tech firms.

Tim Berners-Lee, a British scientist, invented the World Wide Web (WWW) in 1989 while working at CERN in Switzerland. The Web was originally conceived and developed to meet the demand for automated information-sharing between scientists in universities and institutes around the world.

The US Congress in 1996 passed the Communications Decency Act, which primarily was a protection for minors from access to pornography via the Internet.

An amendment, Section 230, has two key subsections that govern user-generated posts. The first, Section 230(c)(1), protects platforms from legal liability relating to harmful content posted on their sites by third parties. The second, Section 230(c)(2), allows platforms to police their sites for harmful content, but it doesn’t require that they remove anything, and it protects them from liability if they choose not to.

In July 2021, President Biden was pissed off with Facebook: “They’re killing people,” the president said about the lies about the coronavirus and Covid-19 vaccines circulating on the platform. A White House spokeswoman announced that the administration was “reviewing” Section 230, the law that protected Facebook and other platforms from being held liable for much of what users post to their websites. “[C]ertainly they should be held accountable,” she told CNN.

Brooking Section: 230 reform deserves careful and focused consideration (2021)

Harvard Business Review: It’s Time to Update Section 230

Last month the Bank for International Settlements (called the central bank for central banks) issued a paper on Big Tech and financial stability: "In the case of big techs, most of the risks arise from their ability to leverage on a common infrastructure – notably large amounts of client data – that helps them gain a competitive advantage in a wide variety of non-financial and financial services and create substantial network externalities. Big Tech business models entail complex interdependences between commercial and financial activities and can lead to an excessive concentration in the provision of both financial services to the public and technology services to financial institutions; consequently, big techs could pose a threat to financial stability in some situations."

The British Financial Conduct Authority in a paper last week noted "There has been increasing regulatory scrutiny at the national, EU and global level into the operations of so-called Big Tech firms and the impact of the activities of Big Tech indirectly on financial services (as critical third parties) and directly as they enter into financial services arena and start offering services in payments and consumer credit. These concerns centre on competition, financial stability and operational resilience."

The University of Chicago economists say in their paper 'Kill Zone' that "Even if the incumbent platform does not undertake any traditional anti-competitive action, the reduction in prospective payoffs to entrants creates a 'kill zone' in the space of startups, as described by venture capitalists, where entry is hard to finance. The drop-off in venture capital investment in startups in sectors where Facebook and Google make major acquisitions suggests this is more than just a theoretical possibility."

Amazon in particular has a history of poor staff conditions despite its mega-profits while Google has operated a caste system where more than half its staff are temps, contractors and vendors (TVCs).

Google has a badge system and "staff are instructed not to reward certain workers with perks like T-shirts, invite them to all-hands meetings, or allow them to engage in professional development training, an internal training document seen by the Guardian reveals." See Quartz and The Guardian. The caste system continued with covid tests.

Last May The New York Times reported that full-time Google employees with office jobs were told to come in three days a week to work. The contractors were told they would no longer have access to work systems from home.

The average hourly rate for Google employees is $68 while contractors in Washington State said most of them made between $16 and $28 an hour.

The Guardian 2021: Google illegally underpaid thousands of workers across dozens of countries

Alphabet said in October that it had 187,000 full-time staff but it does not publish data on the rest of the staff. They are supplied by other companies.

This is effectively a manipulation of the data.

Microsoft announced last June it was ending non-compete clauses for most job categories. These clauses are popular with tech firms.

Last January a class action lawsuit filed in a California court accused Google and Apple of having a non-compete agreement that breaches US competition laws, including the Sherman Antitrust Act of 1890. While Google pays Apple to remain the default search engine on iPhone, iPad, and Mac, the complaint filed says that further “secret” agreements have taken place to destroy competition.

In a ranking of the top 100 tech companies by international market capitalisation (November 24, 2022), the US has 62 companies; China 11; Japan 5; Europe 10 (Netherlands 4 — Philips & Co was founded in 1891 — Germany 2; France 2; Switzerland 2); Tawain 4; S. Korea 3; Canada 2; Argentina, Australia, Singapore and Finland all 1 firm each.

In the next 100, the US has 58 firms. The UK ranks at 163 and 181.

The UK is home to the highest number of European unicorns, privately held startup companies valued at over $1bn, with a total of 47 unicorn start-ups, according to MoneyTransfers last September.

Germany had 30 firms; France had 28; Sweden 8 and the Netherlands 7.

The Economist's Digital Cities Index 2022 of 30 cities ranks in the top 15: Copenhagen; Amsterdam; Beijing; London; Seoul; New York; Sydney; Singapore; Washington DC; Paris; Toronto; Zurich; Barcelona; Frankfurt and Dallas.

London has been ranked the smartest city in the world, followed by New York 2 and Paris 3, according to the 2022 edition of the IESE Cities in Motion Index. The index produced by the Spanish business school ranks 183 cities worldwide on a range of key dimensions linked to sustainability and quality of life for inhabitants. Dublin is ranked 18 for the most improved.

The 5 big tech firms may sometime spend some of their super R&D budgets in ways that could help humanity rather than participating in a space race for example.

The Economist reported this year "Last year YouTube’s advertising revenue, which Alphabet first revealed only in 2020, reached $29bn. That means that in 2021 Google Other and YouTube’s ad business each generated more money than four-fifths of the companies in the s&p 500 index of the biggest American firms...The operating margin for Apple’s app store has been estimated at 78%, according to one case brought against the firm by Epic Games, a video-games maker. For Google, the figure is 62%."

Can they be visionaries or just "fumble in a greasy till"

Apple famously decided that an Irish shell company could be used to channel billions of dollars because it decided that the entity was not tax resident anywhere on Planet­čśĆ Earth

John D Rockefeller never acknowledged that he had been a monopolist. He founded Standard Oil in 1870, and acquired most of the oil refineries in the US, eventually controlling about 90% of the US oil production.

On that late Monday afternoon in May 1911, the oil tycoon was playing golf with Father JP Lennon, a Catholic priest, on his estate in Westchester County’s Pocantico Hills, New York. According to Ron Chernow's 1998 book, 'Titan: The Life of John D. Rockefeller Sr.' the most notorious of the robber barons reacted to the news from the Supreme Court that the Standard Oil Trust should be broken up, with studied nonchalance.

"Father Lennon, have you any money?" Rockefeller is reputed to have asked the priest who said he had none. "Buy Standard Oil," Rockefeller apparently said.

It was wise advice.

Newspapers anointed John D Rockefeller (1839–1937) as the first dollar billionaire in September. His son Junior called it an exaggeration.

Ron Chernow estimated that Rockefeller’s wealth peaked at $900mn in 1913 — that would be worth over $27bn today.