An excited entrepreneur in the social-media space takes a walk with Mark Zuckerberg through the woods. He reportedly shares his product road map with Zuckerberg, and then reads a few weeks later that Facebook has launched a rival product. Facebook's appropriation of an upstart's features, including Snapchat's Stories, is legendary. Facebook went so far as to spy on what users did outside of its platform “to decide which companies to acquire, and which to treat as a threat.” Similar examples abound in the tech world, including the way Amazon acquired Diapers.com as the culmination of a price war.
In his recent book Can American Capitalism Survive?, Steven Pearlstein highlights the difference between voluntary exchange and economic coercion: “The moral case for market capitalism rests on two principles that strike us as fair and just. The first is that markets are rooted in voluntary exchange….The second principle is that people are entitled to own and keep what they produce.” Pearlstein goes on to note that an entrepreneur's “just deserts” should include compensation for “talent, ingenuity, and risk-taking that we bring to that effort,” in addition for one's time and effort to bring a product to market.
And yet the exchange between online merchants and content creators—“edge providers”—on the one hand, and tech platforms such as Amazon, Facebook, and Google, on the other, is not strictly voluntary. These platforms dominate their respective fiefdoms, set the rules of engagement in their ecosystems, exploit information advantages owing to platform ownership, and discriminate in favor of their own content and against similarly situated independents. And the rewards for edge innovation are dampened by runaway appropriation. Indeed, the dealings between platform and edge providers have all the hallmarks of coercion, strongly suggesting that few input providers capture anything close to their value added, and that even acquired firms may not receive their “just deserts” despite the seemingly impressive payouts.
Perhaps capitalism will survive, but the economic prospects for independents in the internet economy—and edge innovation generally—will be dismal.
In a recent issue of The Economist, venture capitalists referred to the area around the tech giants in which startups are squashed as the “kill-zone.” Classic examples of new ventures that have flown too close to the sun include BareBones WorkWear, Beauty Bridge, Collectible Supplies, Diapers.com, and Rain Design (in Amazon's orbit); Foundem.com, TripAdvisor, and Shopping.com (in Google's orbit); and Grubhub, Snapchat, and Timehop (in Facebook's orbit). New research using PitchBook data reveals that broadly defined industries in the Amazon/Google/Facebook orbit experienced a collapse in first financings since 2015, a reduction not observed in comparable tech sectors.
