Why do companies that were once the face of the anti-establishment startup world inexorably become the very sort of business that they were built to destroy?
There’s no single reason, and many of the ways that tech companies become their parents are innocuous. A new generation of leadership is an oft-noted catalyst for change at tech companies. From Gates to Ballmer, to pick a well-known example. Markets can also change, sometimes for the worse, leading to companies molting into something less recognizable and friendly as the years pass.
The core reason that companies generally, and tech companies more specifically become the very sort of corporation that they once hated and took on with vigor is the need to keep growing, forever. This is mostly a public company problem, but as tech companies that grow to great worth are nearly always public, we can discuss post-IPO tech companies and tech giants as the same substance.
The key sin of the public markets is that companies are expected to maintain growth until the heat death of the universe. Naturally, you might think, what else is a company for? A fine question, and not an idle one.
At issue for tech companies is the fact that they often start life, and conquer or invent their market while providing massive customer or consumer value surplus. This is how nearly every big tech company grows from small to large, and why we often have a pretty good vibe about technology concerns before they reach maturity.
This is not hard to understand if we discuss an example. Let’s talk about Mountain View. When Google was busy destroying the search engines that preceded it, it provided a simply killer service for consumers at no cost while able to make buckets of money for itself by placing contextual ads next to its results. Everyone won, except for the preceding generation of search products that no one misses; if you pine for Altavista, points, but I can’t join in your tears as it wasn’t very damn good.
Google eventually went public, everyone made money, and the core search experience that it offered remained pretty good for some time. Things were going well.
Later, the company had to find another source of growth to keep its top line ever-expanding. So it built itself a parent company and kept pouring money into new projects. Most of those efforts failed to generate enough revenue to matter — that Alphabet’s YouTube win is the result of an acquisition is worth keeping in mind here, as is the fact that Google Cloud remains somewhere in third place in its market while also losing money. So what was Google to do? The simplest way to keep growing was to juice more revenue from its search business. So it did.
We’re speaking broadly here, compressing history and being slightly loose with timings. But I think that anyone reading this will agree that, in the past half decade or so, Google has consistently made its search experience worse for the average user, allowing it to serve more advertisements per query and thus more revenue. (This has manifested in Google moving ads into search results, obfuscating what is and is not an ad, and desperately building features into its search results to prevent users from heading out to a useful, external website.)
In simpler terms, Google began to trade consumer surplus generated by early technology wins — its core search technology that was massively better than its erstwhile, and now dead competition — for rent seeking. A little of this is to be expected, but over time the ratio of consumer value surplus to rents sought by a major tech company change their center of gravity enough that the resulting company and product bear little resemblance to their earlier form. This is why Google was once a company famous for saying that being evil was bad, and is now a corporate entity that enjoys far less market trust thanks to its actions.
A series of silly little equations can help us keep this dynamic straight:
Big tech company: Customer (consumer) surplus < rents sought
It was before my time, but I suspect that Oracle was once a company that built cool technology that was exciting and useful. Over time, however, Oracle became a company more famous for its legal department than new innovation.
What’s scale got to do with it?
The evolution of tech companies providing large consumer and customer value surplus to later in life consuming all that surplus and then some, is predicated in part on size.
How so? Apple can get away with not only demanding a 30% cut of the sale of an application in its App Store, but also its effort to consume 30% of all commerce that occurs on iOS because it is big and wealthy and owns enough of the market to pull off the strong-arm tactic. Companies hate that Google offers ad slots atop the search results page for their name as it forces them to effectively rent their own, earned real estate — so much for that customer surplus, now it’s a tax!. But Google gets away with it because it is big and wealthy and owns enough of the market to pull off the strong-arm tactic.
The bigger a tech company gets the worse it becomes at providing consumer and customer surplus, because it needs to eat that margin (of a sort) to keep growing. Growth demands that tech companies eventually consume that which first engendered them good will.
The obvious answer to all of this is startups. And I don’t mean that ironically. New tech companies can and should come along, attack the giants of their day by offering services and products that provide ample consumer and customer surplus, and tear down their elders. How is this possible? The power of technology, baby.
Saving a discussion of what is a tech company for another day, it’s fair to say that tech allows companies to create new ways of doing existing tasks, or creates new categories of tasks, that provide huge value compared to prior methods (or the lack thereof). This means that startups can provide ample surplus and grow at the same time. It’s neat, and is the underlying reason why I chose the business niche that I occupy today for TechCrunch to focus on.
When does anti-trust come into this?
Right now. The above is why everyone in startup-land should be in favor of vigorous anti-trust legislation, and supportive of a more active government when it comes to defending competition between companies.
If big tech can get away with eating customer and consumer surplus without risk, they will do so. So they must be stopped. Startups, however, face myriad challenges while taking on incumbents or creating entirely new business categories. What we can do to help is to ensure that big companies cannot simply buy, or price their way to immortality is to prevent them from becoming too big to die. Anti-trust matters as it is the antidote to massive technology sprawl, creating room for upstart tech companies to maneuver, and attack their bigger siblings.
The real zombie companies are not startups stuck with 2021-era valuations and a dwindling cash balance. Those companies are mostly fucked. The fact that they can die actually matters here as it’s good to see companies die; creative destruction in all its forms demands payment in blood. No, the real zombie companies are the bigger tech companies that can use their position atop the commanding heights of the business battlefield to ensure that they stay fat, growing, and increasingly fed off of rent-seeking.
We want to live in a market where companies that are better at seeking rents than providing consumer or customer value surplus are under constant barrage, not a market where such companies are safe. Break them up!
Next up: Why big tech companies are not only able to consume critical oxygen that allows them to vampire their markets too long, but also why their pursuit of endless growth means that small folks get screwed over again again. We’ll examine that point through the lens of Amazon, audiobooks, and indie authors.
The featured image on this post is an excerpt from a piece of Jené Stephaniuk’s work, whom I wish to thank.
