Technology Giants and Empowering Small Businesses

Welcome back to The Innovation Armory. This week’s piece puts forth a modern framework for thinking about what anti-competitive behavior means in the context of today’s technology companies. I also interview founders whose technology businesses aim to empower founders through robust technology infrastructure platforms.

Next week’s piece will discuss the industry-wide implications of recent news in the media space including Amazon’s bundling of Twitch with Prime and the announcement of a new Sims reality TV show. Now, onto today’s update.

The recent big tech antitrust hearing put the US’ largest technology companies on notice about potential anti-competitive action and has sparked significant debate about breaking up these businesses. Historically, most monopolies in the US have been broken up over pricing concerns, restricting supply or structuring pricing in a way that was negative to the end consumer. What makes big technology so tough to regulate is that in most instances, they have dramatically reduced prices for consumers and appear to be offering superior value to each individual at a surface level. For example, Amazon’s massive supply chain investments have enabled free one day delivery (with a Prime membership) and content investment has spurred access to tons of free content through Amazon Instant Video. 

A Modern Monopoly Paradigm

It is important to think about anti-competitive practices in a more holistic sense rather than primarily framing the discussion in terms of consumer pricing. Historical monopoly legal paradigms have focused on price-based coercive monopolies. Today’s technology giants have built massive competitive moats non-coercively all while claiming to be champions of the consumer. Below I outline three important framing mechanisms to think about what a “monopoly” and “anti-competitive behavior” ought to include in the modern digital era.

1. Non-Apparent M&A Use Cases - when evaluating whether to allow an acquisition, regulators ought to look beyond whether a technology is monopoly-inducing in a specific sector, but rather whether that technology provides a company with a non-apparent but powerful unfair competitive advantage in its existing market. In 2013, Facebook acquired Onavo, a mobile web analytics business, that it later used to spy on users by tracking their non-Facebook phone activity to use a) for targeting and b) to monitor usage of competitors’ applications and also monitor which to acquire (i.e. WhatsApp). Onavo’s initial business model and market appeared totally dissimilar to Facebook, but the combined technology afforded Facebook an unfair competitive advantage over its advertising peers:Of course, it would be unreasonable for regulators, at the time of acquisition, to hold a technology giant accountable for how it may use a technology in anti-competitive ways. However, regulators need to think about how proprietary technologies may be used anti-competitively and put restrictions on their use in those ways as part of M&A approval processes. This requires more technologists to have a seat at the table in politics to have the technical knowledge to understand non-core but harmful use cases related to a high-tech acquisition.

2. Market Scope - To determine whether a company is monopolistic, regulators must think more broadly about how to define the market within which a business operates. In the case of Facebook and Instagram, at the time of the acquisition, one operated primarily in the desktop digital advertising category and the other also digital, but mobile and photo first. Broadly, though, they both compete for user social attention. Especially in the early days of a new technology (i.e. mobile advertising) It is important for regulators to properly identify whether the emerging technology is effectively a new market or an extension of an existing market. Most in advertising nowadays would say that desktop and mobile digital are part of the same advertising category.Rather than thinking about markets in hyper-technical terms, it is important to take a bird’s eye view and think about whether consumers from one business regularly face a choice to use one service or another. That was certainly the case with Facebook and Instagram. For digital industries, it is important to consider alternative indicators of market power besides revenue market share, such as monthly active users, time spent on platform, etc. for industries that may appear technically different on the surface but are converging. Moreover, even if two sectors seem totally distinct from a functional perspective, regulators should consider whether a company is effectively treating two industries in combination through anti-competitive action. For example, in the case of Amazon, its massive logistics investments buttress its e-commerce differentiation. However, its logistics businesses would likely not be profitable on their own. These investments represent losses in the courier industry that are subsidized by gains from other more profitable Amazon sectors like AWS, posing an existential threat to competing courier businesses like UPS and FedEx over the medium to long term. In essence, Amazon is co-opting the courier industry as a value differentiator in e-commerce but can afford to lose substantial standalone capital on logistics to strengthen its e-commerce moat and offer consumers free one-day shipping through Prime. This is effectively what Microsoft did to the browser industry by tying Explorer to its operating system, which triggered anti-competitive investigation. These technology conglomerates appear non-monopolistic on the surface because they are diversified across many industries. However, it is in fact their diverse portfolio of business lines and scales that allow them to co-opt full industries by subsidizing losses to enhance customer value and drive user stickiness. If technology conglomerates treat two industries together by subsidizing losses in one with profits from another, regulators ought to look at the companies behavior in both segments to evaluate aggregate portfolio-wide anti-competitiveness. For larger technology conglomerates, I also think it is important to consider whether the value of the businesses being housed under the same parent accrues to the consumer or to executives and shareholders. The former is likely the case for Amazon shopping / logistics but does not ring true for Facebook / Instagram / WhatsApp being housed together, which may facilitate further user data abuse.

3. Gateway Power - customers care about relative cost, that is getting good value for a product offering relative to its price. Given their scale and market pervasiveness, technology giants can offer products at the lowest price but negatively impact customers by severely restricting consumer choice. This choice restriction occurs when aggregation platforms serve as gatekeepers but exercise their gateway power in arbitrary or unfair ways to the detriment of small businesses and in turn consumer choice. Below summarizes some examples for Amazon, Google and Apple:All three of these technology giants have used or been accused of using their gateway power to obscure consumer discovery of competing offerings. Product discovery is absolutely critical to enabling consumer choice and incentivizing effective innovation.

Alternative Frameworks for “How big is too big?”

Outside of considering whether a firm is monopolistic or anti-competitive, I think regulators and analysts ought to consider alternative value metrics by which to gauge whether these businesses are too large. These alternative metrics require looking beyond a tech giant’s major market and how they interact with a consumer there and instead considering their impact across the full technology ecosystem and across American society. I propose three such evaluative metrics below along with a couple of thoughts / examples to consider within each framework:

Innovation Stifling

Does market dominance negatively impact innovation and technological progress?

1. Copycat vs. Organic Development - Does a substantial portion of the company’s growth come from copying features of another business? Is it able to leverage its organizational and financial scale to quickly copy businesses and legally obfuscate the true source of its R&D? Innovations almost always come from a mixture of ideas / products one has previously exposed to that are synthesized in a new and unique way. However, organizations that regularly and blatantly copy almost the exact features of a competitor may not be the best champions of innovation. Facebook has notoriously copied many of Snapchat’s features (stories, filters, etc.) in an attempt to destroy the app.

2. Founding Mission - should the investing ecosystem be backing startups on the basis that they might either be competitive with or acquired by a technology giant? An increasingly larger number of startups nowadays are being judged based on how their mission interacts with big tech. Many of those that are deemed to be competitive with Google, Amazon, Apple or Facebook in a large enough target market don’t receive funding. Those that receive funding often couch their mission / vision on terms that set their sights on being acquired by a technology giant. I am not arguing that founders should not try to sell to these larger companies or that there is an issue with using that as a path to liquidity via an exit. I just think there is a broader industry issue if so many startup missions are being evaluated on the basis of how they could be crushed by or bought by one of the big four tech firms.

3. Emergence of New Paradigms - does the technology firm’s dominance prevent the emergence of a new structural shift in technology paradigms that could be damaging to the giant’s underlying business? Much of the last innovation over the past couple of decades has come from huge paradigmatic shifts, i.e. the development of PCs, phones and shift to the cloud. If Microsoft’s anti-competitive behaviors were not checked, is it possible that Apple, Facebook, Google or Amazon would not exist today? In September 2019, Facebook acquired CTRL Labs, a neural interface startup. Its acquisition was likely to augment its VR capabilities. However, the neural interfacing technology could also be used to enable bionic computing and human communication with devices via neural activity. Did Facebook view this technology as a threat to its web and mobile based technology platforms? Also, in China, PinDuoDuo pioneered a thriving social commerce industry, which makes money as a social network by monetizing users via commerce instead of advertising. I would argue commerce is a socially healthier monetization model for a social network (as discussed later in this section). Facebook is banned in China and so could not influence the social landscape effectively there. Did Facebook’s dominance in the US and insistence on using an advertising based model prevent the emergence of a healthier social commerce model that could be more robust for small businesses and cause fewer mental health issues?

Damaging to Democracy

Do technology giants actively use or condone usage of their platform in ways that undermine, damage or question the democratic backbone of our country?

1. Income Inequality - do the larger technology firms contribute to broader wage and income inequality across the US? US income inequality is at its highest level in over 50 years. Big technology businesses, the largest companies of the generation, employ substantially fewer workers in high-level roles than industrial giants of prior generations. These higher paying jobs have become scarcer and tougher to qualify for given the level of technological sophistication and data skills required for many of them. These firms have taken middle class jobs and shifted them down the spectrum to lower paying unskilled labor roles such as gig economy roles (Uber drivers) and Amazon warehouse workers. Allowing these firms to continue to grow at this pace will mean more automation and more unskilled labor jobs.

2. Informational Manipulation & Transparency - have these firms enabled informational manipulation, especially in the context of political information? In the 2016 presidential elections, the Russian government interfered and spread propaganda leveraging Facebook and other popular social media platforms. If a platform is so unregulated that it can be used as a weapon by America’s enemies against democracy, then could it be too large?

3. Unchecked Privacy Abuses - Is the value and convenience of large technology platforms great enough to justify violations of the right to privacy, especially for our data and online identities? The Facebook Cambridge Analytica scandal is case in point.

Counter to Social Goals

Is their market superiority counter-productive to the achievement of key health, safety, fairness and social objectives?

1. Pricing Discrimination - Does over-collection of data allow giant technology companies to price-discriminate in unfair ways against select consumer groups? Uber is using a route-based pricing model that charges different amounts to consumer groups based on how machine learning calculates one’s willingness to pay. Given many of these AI algorithms are “black box”, over time it is possible that large technology companies may inadvertently use their large datasets to discriminate on other demographic bases. For example, Apple’s recent credit card was accused of being discriminatory towards women. What will the social consequences be if our data is used as a basis for discrmination in other areas like healthcare and education as technology giants continue to expand their reach?

2. Mental Health Crisis - are the benefits of social media so significant that they justify a rising depression and suicide rate? Teen suicides are increasing rapidly and at historically high levels and many mental health experts attribute the rise to depression and mental disorders that result from overuse of social media. Are technology giants too large if they are harming this generation of youth?

3. Labor Practices - Should the world’s most valuable companies be able to treat such a significant group of essential labor as a commodity class? Amazon notoriously treats its warehouse workers like robots, demanding maximum efficiency with low-wage labor in a physically demanding role. One former warehouse worker described working in an Amazon warehouse as being “hit by a garbage truck” in her recent book On The Clock. Is there a point where the quality of the average American’s job deteriorates so much that no amount of technological innovation can counteract the loss of professional and social meaning in their lives?

Empowering Small Businesses

Technology companies that empower small businesses against technology giants and more generally against larger corporates will be well positioned as Silicon Valley’s kingpins undergo anti-competitive investigation and as coronavirus has spurred a greater interest in buying and supporting local artisans and small business owners. One such company in the public markets is Shopify which empowers small retail businesses to compete with Amazon on shopping experience and fulfillment efficiency with best-in-class digital tools. Shopify’s stock has had a pretty explosive run in 2020 as it is up >3x since its near-term trough back in March:

There is a growing class of private companies that similarly provide best-in-class digital infrastructure to empower independent business owners against industry titans. Within the retail space, Bond is another private company that empowers retailers to compete with Amazon on the basis of fulfillment through powerful consumer logistics. Bond focuses on the post-purchase experience and leverages technology to deliver best-in-class same-day delivery and hyperlocal storage to a variety of retailers. I caught up with Bond’s CEO and CMO, Asaf Hachmon and Dan Eblagon, and they shared their thoughts about how Bond empowers retailers to compete against Amazon:

Beyond traditional retail, Joe Coffee is a technology platform to empower independent coffee shops to compete with their industry giants (Starbucks, Dunkin) with digital storefront, mobile ordering and loyalty management functionality that is custom-tailored to the nuances of the cafe and coffee space. I connected with Nick Martin, CEO of Joe Coffee, to learn more about how Joe empowers small coffee businesses. 

My Discussion with Nick Martin (CEO of Joe Coffee)

SN: What nuances does the coffee space have that makes it under-served by traditional horizontal food ordering marketplaces and restaurant technology platforms?

NM: First, we did research that speaks to the opportunity here that showed that 70% of consumers surveyed that are ordering ahead at national chains would prefer to support independent businesses if they had similar experiences including order ahead, loyalty, rewards and convenience (proximity of nearest location). That is why we think building a rich independent coffee network is so important so that customers can efficiently access a network of artisanal coffee shops. Consumers don’t want a white label app. That won’t pull them from national chains. Second, coffee businesses are low average tickets and rely on high frequency of purchases whereas casual dining places build a business on more moderate ticket sizes. Coffee chains can’t afford to have hitches in their workflow. 70% of their business comes in before 10 AM and have limited capacity. Their operating margins improve by operating more efficiently during the busier times with effective order ahead platforms. We know shops that have doubled their revenue during those busier times without having to add any staff due to these technology implementations. In summary, some of the main differences are the workflow requirements for baristas, convenience factors for consumers and how ritualistic and relationship based that choice is, necessitating a focus on loyalty. Starbucks is driving same-store sales growth with personalized offerings. Independent coffee shops can drive similar improvements with by leveraging loyalty data. 

SN: What do you view as at stake in empowering small businesses, both in coffee, but more broadly across America?

NM: On the small business owner side, the business you create is an expression of yourself and it tends to serve the market more efficiently because there are so many different appetites for various experiences. Especially in coffee, shops are a place of identity belonging. It’s such an ill fit to take one common brand experience with a chain and shoe horn it into all of these communities. It infuses sameness which erodes a sense of belonging and the diverse set of experiences that makes a market really special and the coffee sector really special. From a consumer perspective it is a more meaningful and richer experience. For business owners, there is self-actualization that comes with running and owning your own business. Even if you are making less money and working 7 days a work / 15 hours a day, there is a freedom benefit. These are the types of people we want to empower with digital technologies so they and their businesses can thrive. This entrepreneurialism is getting harder to maintain in the food space but definitely worth preserving.

SN: Joe helps optimize the experience of fulfillment, in-store experience and pick-up for coffee. What role do you play in the discovery process to helping small coffee businesses gain more exposure for their brands? How can you empower small businesses to better reach potential new customers?

NM: For the first phase of building Joe, we focused on the utility of providing a trustworthy and consistent experience for the consumer when a mobile order or transaction goes through to a coffee shop. Now we are entering the next phase where we are asking how we create that discovery value to coffee shops through our network. Beyond partners where you can order ahead, we want our consumers to be able to effectively discover local coffee businesses. We have this idea of “discover with intent” where we hope to eventually automatically serve you coffee shop discovery recommendations whether you are a third wave coffee snob, or want a place with a dedicated parking spot or a shop with curbside pickup. Being able to do this within the independent coffee space will be key for these small businesses.

SN: Outside of the demand side, on the supply side, what opportunities do you see in empowering independent coffee shops including improving supply chains and overhauling purchasing efficiencies for smaller shops?

NM: We have been focused on the front end digital experiences but the larger we get, the more buying power we have for these shops from a supply chain perspective. There is certainly a lot of value to create across the whole value chain. We are already talking to roasters who are eager to connect through a marketplace with these independent businesses. All of these independent shops pay substantially more than a Starbucks for their beans and broader supplies which inflates their COGS. If we can continue to build a robust marketplace, there is definitely additional value we can add on the supply side to lower costs. We want to do all this hard work for the business owners on the parts of the business they don’t want to deal with so that they can focus on doing what they love. 

All Innovation Armory publications represent expressly my individual views and do not represent the views of companies with which I am currently associated or have previously been associated. These publications are my personal opinions and are not meant to be relied upon as a basis for investment decisions.