Google and Facebook’s “Kill Zone”: “We’ve Taken the Focus Off of Rewarding Genius and Innovation to Rewarding Capital and Scale”
A Stigler Center panel explores the implications of tech giants’ dominance on innovation and startups.
HT: this morning's Alphaville Further Reading post links to a different ProMarket post, jogging memories of the above.Earlier this week, Treasury Secretary Steven Mnuchin joined a growing number of public officials concerned about the impact of Internet monopolies when he called on the Justice Department to look into the power that digital platforms like Google have over the US economy. “These are issues the Justice Department needs to look at seriously,” he told CNBC, “not for any one company, but obviously as these technology companies have a greater and greater impact on the economy, I think that you have to look at the power they have.”
Mnuchin’s comments followed a 60 Minutes report that examined the enormous power Google wields over potential competitors thanks to its monopoly in online search and search advertising. “If I were starting out today, I would have no shot of building Yelp,” said Jeremy Stoppelman, co-founder and CEO of Yelp, during the segment. Yelp has long argued that Google has abused its dominance in local search to favor its own services over competitors such as itself, and is currently attempting to convince European competition authorities to launch a fresh antitrust case against the company.
“If you provide great content in one of these categories that is lucrative to Google, and seen as potentially threatening, they will snuff you out,” added Stoppelman. “They will make you disappear. They will bury you.”
The sentiment that startups effectively have no chance of competing against the “Big Five” tech giants—Alphabet, Amazon, Apple, Facebook, and Microsoft—is one that has become increasingly common among tech entrepreneurs and venture capitalists in recent years. “People are not getting funded because Amazon might one day compete with them,” one founder told The Guardian. “If it was startup versus startup, it would have been a fair fight, but startup versus Amazon and it’s game over.” As the author and media scholar Jonathan Taplin pointed out in an interview with ProMarket, the very notion that someone could start a new search engine that competes with Google “is just laughed at by the venture capital community.”
Investors and entrepreneurs, said the venture capitalist Albert Wenger during a panel discussion at the Stigler Center’s annual antitrust conference last month, are now wary of entering into direct competition with giants like Google and Facebook. Both companies, along with Amazon and Apple, effectively have a “Kill Zone” around them—areas not worth operating or investing in, since defeat is guaranteed.
Tech platforms, after all, have endless resources at their disposal to either purchase or crush new upstarts they perceive as threats. Increasingly, startups that operate in areas coveted by tech giants face a similar choice: sell—or get crushed. The Big Five have made over 436 acquisitions in the last decade, with little to no challenge from antitrust authorities. When startups refuse to sell, they find themselves facing an unlevel playing field. Snapchat, which turned down a $3 billion acquisition offer from Facebook in 2013 (and a $30 billion bid from Google in 2016), is a case in point: after it failed to acquire Snapchat, Facebook simply cloned many of Snapchat’s key features, using its vast reach to completely undercut its growth. This is not an uncommon occurrence.
“The Kill Zone is a real thing,” said Wenger, a managing partner at Union Square Ventures and an early investor in Twitter. “The scale of these companies and their impact on what can be funded, and what can succeed, is massive.” He went on to quote one angel investor who told him that he only invests “in things that are not in Facebook’s, Apple’s, Amazon’s or Google’s kill zone.”
The kill zone, noted Wenger, is not a new phenomenon. Microsoft had a similar kill zone around it when it dominated the tech industry in the late 1990s. “It was a similar playbook, where Microsoft would see, ‘What kind of things are doing well on my platform?’” he said. “Then they would just absorb those into the platform itself. That is a playbook that’s being exercised by Amazon, by Google, by Facebook, by all the big digital platforms.”All this has profound implications for the startup ecosystem and for the future of innovation. Is the dominance of digital platforms, routinely hailed as the most innovative companies in the world, actually hindering innovation? Much of the Stigler Center panel, moderated by Fortune magazine’s executive editor Adam Lashinsky, revolved around this very question. In addition to Wenger, it featured patent expert Elvir Causevic, managing director and co-head of Houlihan Lokey’s Tech+IP Advisory practice; Glen Weyl, a principal researcher at Microsoft Research New England and a senior research scholar at Yale’s economics department and law school; and Matt Perault, director of public policy at Facebook.
While opinions as to how to address the power of digital platforms and spur innovation varied wildly, most of the panelists seemed to agree on one basic premise: the size and scope of digital platforms has become an impediment to innovation.“Small Companies No Longer Have Access to Patent Protection”
Innovation used to be associated with small companies and entrepreneurs. There’s a reason why the garage has taken such an important place in the mythology of the tech industry: Silicon Valley, as we know it, is the product of entrepreneurs starting companies in their garages, from Bill Hewlett and Dave Packard in the late 1930s, through Steve Jobs and Steve Wozniak in the 1970s, to Larry Page and Sergey Brin in the 1990s.But the vaunted garage is little more than a myth in today’s Silicon Valley. The rise of digital platforms has been correlated with a historic decline in startups: new business formation in the US has declined by more than 40 percent since the late 1970s and is near a 40-year low. At the same time, as the New York Times’ Farhad Manjoo pointed out last year, the technology industry has gradually become “a playground for giants.”...MUCH MORE
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