Business development and competitiveness - 'Big Tech' isn’t the problem, it’s the solution

Profile picture for user kmarko By Kurt Marko January 2, 2020
Summary:
Let's not take a 19th century robber baron mindset into the 2020s when it comes to considering 'Big Tech's role.

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The last decade was marked by the incredible growth of a few technology companies as they were able to scale their online and cloud operations to previously impracticable sizes by exploiting both the overall march of technology and the inherent limitless scalability of software.

A historical look at the stock market capitalization of the so-called FAANG stocks demonstrates the scale of growth that has got many commenters, regulators and legislators saying that things have gotten out of hand.

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Tech too big and suffocating competitors?

The immense size of these companies, save Netflix which is included because it is commonly grouped in the FAANG hyper-growth category, but is now facing stiff competition from media giants like Disney, has caused both US and European regulators to place them under intense scrutiny for anti-competitive practices and other behavior detrimental to consumers. A September Congressional Research Service (CRS) report summarized the potential cases against “Big Tech” this way (emphasis added):

The Department of Justice (DOJ) and Federal Trade Commission (FTC)—the agencies responsible for enforcing the federal antitrust laws—agreed to divide responsibility over investigations of the Big Four’s business practices. Under these agreements, the DOJ reportedly has authority over investigations of Google and Apple, while the FTC will look into Facebook and Amazon.

The DOJ and FTC investigations into Big Tech will likely involve inquiries into whether the relevant companies have illegally monopolized their respective markets or engaged in anticompetitive mergers or acquisitions.

Similar scrutiny is underway in Europe as the EU’s competition commissioner is investigating whether Facebook and Google have used their massive collection of user data to harm competitors and illicitly violate users’ privacy. Other EU probes add Amazon and Apple to the list of mega-techs suspected of abusing their dominant market position.

Underlying all the oversight and suspicion of big tech are two questions:

  • Why are technology companies growing to such enormous sizes and is it an inevitable property of today’s technology-driven digital economy?
  • Are technology companies using their market dominance to unfairly harm competitors and disadvantage consumers?

On the second point, there are sound arguments that the benefits these companies bring their customers far outweighs any downsides of winnowing weaker competitors from the market. A professor of business law at Northwestern’s Kellogg School of Management argues that antitrust regulations are designed to protect consumers from monopolies, not other businesses from stronger competitors (emphasis added).

Because search engines, social media platforms, app stores, and online marketplaces offer many valuable services to consumers for free, this complicates any arguments that consumers are being harmed, even if other businesses and industries are experiencing disruption

Simply because a firm becomes large and has innovated better than its competition does not in and of itself lead to the conclusion that an antitrust violation has occurred.

Thus, bigger doesn’t imply monopolistic and anti-consumer.

Are tech-heavy businesses winner-take-all?

The other burning questions raised by big tech is whether such scale is an inevitable outgrowth of market-dominating success in the digital age that leaves smaller firms in the same or related markets hopelessly disadvantaged given the rate of technology change in data analytics and AI. A Wall Street Journal article cites economic research positing a theory that the primary difference between today’s giants of industry and those of the past is how they spend on technology. Summarizing the key point, the article notes that (emphasis added):

Tech companies such as Google, Facebook, Amazon and Apple—as well as other giants including General Motors and Nissan in the automotive sector, and Pfizer and Roche in pharmaceuticals—built their own software and even their own hardware, inventing and perfecting their own processes instead of aligning their business model with some outside developer’s idea of it.

From that, the writer takes an enormous deductive leap:

The result is our modern economy, and the problem with such an economy is that income inequality between firms is similar to income inequality between individuals: A select few monopolize the gains, while many fall increasingly behind. Might it eventually be the case that the biggest firms aren’t just dominant, but all-encompassing?

The conclusion is supposedly justified by data showing that:

  • The largest firms have a higher percentage of employees in IT.
  • The productivity of firms in the top-5 percentile of productivity is growing faster than the bottom 95%.
  • The top-four firms in an industry derive twice as much revenue from each incremental share of IT investment as the rest of their peers.

Concluding that such data demonstrates the unavoidable inequality of a winner-take-all system muddles cause and effect. Did these businesses become successful because of their technology spending, or are successful companies run by competent managers who see the value in technology and devise clever applications for it that others don’t?

The conclusions also confuse the itemizable expenses of a large company with differences in activity or effort. The fact that companies of at least a thousand employees spend 60+ percent more on IT than those with under a hundred is partially, if not entirely explained by the job specialization and accounting granularity required of a large company. Smaller firms might have very few IT personnel, but usually supplement them with outside IT services and consulting. Indeed, there’s a persuasive case that such IT outsourcing is more efficient and flexible than hiring dedicated workers.

The overall conclusion of a growing technology gap also ignores the disruptive innovation that can upend an established business model...products and services. typically developed by small, unknown competitors.

Sharing the wealth

The biggest error in the 'Big Tech' theory of inevitable monopolization is the fact that many of these firms share the wealth by turning their technology Investments, optimized processes and massive infrastructure into rentable cloud, commerce and logistics services. Some 53% of the purchases on Amazon go to third-party sellers, while half of Amazon’s operating income comes from AWS, making Amazon one of the world’s biggest small business enablers. Likewise, Google and Facebook provide advertising platforms that enable businesses to target the most likely customers out of the billions viewing online content.

The WSJ counter-argument that the internal software used to run Amazon’s logistics and IT infrastructure platforms remains proprietary entirely misses the point of business process outsourcing and cloud services. The goal with both is to encapsulate best practices and economies of scale efficiencies into valuable business services that obviates the need for smaller or less technologically sophisticated companies to develop such expertise themselves.

Furthermore, the potential business benefits of cloud services are only growing as increasingly sophisticated AI and data analysis products make features available to anyone that were once confined to deep-pocketed organizations that could deploy the required infrastructure and expertise. Indeed, such technology is now built into packaged applications that let even a Mom-and-Pop shop hiring a local Web developer improve their products and services via the same image recognition, textual analysis, personalization and recommendation software as Amazon, Google or Microsoft use internally.

My take

There are competing narratives about the implications of big tech; one extrapolating to a dystopian future of technology and market monopolists manipulating their customers and crushing competitors in an upward spiral of wealth, surveillance and political influence. In this world, technology-fueled digital business is a zero-sum game in which the few winners control the entire Monopoly board and all the cash. Indeed, it’s a 19th-century view of Robber Barons for a digital age.

I contend that such static thinking ignores or minimizes the dynamic power of technology diffusion, democratization and disruption. My counterpoint view is a world of increasingly powerful technology disseminating to a wider and more diverse base of users, some of whom will exploit it in unpredictable ways to create new businesses with innovative products and services in more markets serving new customers, thus expanding the economic pie, not merely re-slicing it. Cloud services are a crucial vehicle of such technology propagation, however, they enable higher-level services in logistics, communications and resource sharing (both physical and personnel) along with a host of industry-specific services in medicine, manufacturing and retail.

As we open a new decade, the leverage of technology diffusion will enable a new generation of innovators to move the earth in ways that will seem just as astounding as today’s world would look to someone a decade ago.