The Trouble with Tech Companies (and Their Strategies)

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0:49I'm Adi Ignatius. I'm Alison Beard, and this is the HBR IdeaCast.

1:01So, Alison, you know, there are times when someone puts their finger on something that we sense and that we experience, but we don't yet have a word for. Such as? Well, Clay Christensen did that with disruption, right? The term is overused now to refer to almost any business challenge, but his definition was very precise. When newcomers start at the bottom of the market, win customers there and innovate up the value chain to displace the incumbent. Okay, so now Cory Doctorow, a well-known tech writer, has put his finger on another phenomenon that did not have a name. And that is the gradual evolution, he would say, deterioration of tech platforms.

1:38So Facebook, Twitter, Amazon, and so on. We fall in love with them, but they evolve into something we fall out of love with, but we're kind of stuck in their world. And he calls that the inshittification of these services. Okay, this is not a family-friendly term, but it was picked as the word of the year by a couple of big dictionaries. Yeah, that is definitely not a word that I'm very comfortable saying, even though I can generally swear with the best of them. But I do know exactly what you're talking about. And I think it happens in lots of areas. You know, there's a product or service or platform, as you say, that starts really great and then gets worse over time because the organization, you know, whether it's public or private, becomes less focused and complacent.

2:19in a perfect world, the market would punish them for that. You know, there would be clays disruptors and consumers or business clients could take their money elsewhere. But I guess if they're dominant in their corner of the industry or their geography, that's sometimes not feasible. So I'd love to know if there's a solution. So that's what we're talking about. So my guest this week is Cory Doctorow, journalist, writer, keen observer of the contemporary tech world, and author of the new book, In Shittification, Why Everything Suddenly Got Worse and What to do about it. So here's our conversation.

2:52I've worked for a digital rights group called the Electronic Frontier Foundation, which defends digital rights online. And I've been working for them for 24 years, all my adult life. And I have tried many ways of engaging people with these very abstract techno, social, political critiques of how our platforms are regulated and how they operate. It turns out that swearing was the secret that cracked the nut, right? That that giving people a minor license to a bit of profanity makes them very happy and lets them go out and do it. So in shitification at its crux is a description of how platforms decay, backed by theory of why they decay.

3:33Platforms are first good to their end users. They lure those end users in. They find a locus of lock-ins so the users can't readily leave. Once those users are locked in, they make things worse for those end users in order to tempt in business customers. One way to think about this that's very straightforward is Facebook went from promising users they would never spy on them to spying on them a lot. Having locked in those business customers, they then abuse those business customers as well. And the end goal is to draw out all surplus value allocated to shareholders and executives and create an equilibrium where there's just like the minimum homeopathic residue of value left to keep users locked in and then keep business customers locked to users and to return all surplus value to shareholders and executives.

4:15Okay, now surely we must have some agency here. I mean, why can't we just leave the platforms when we agree that they've gotten lousy? Well, that's where the lock-in comes in. And, you know, maybe I'll work backwards here and talk about lock-in of business customers. So we have got a lot of discursive and theoretical attention on monopoly, right? Powerful sellers. But we don't pay a lot of attention to monopsony, which is powerful buyers. if you operate a firm you understand that if a customer accounts for say 20 or 30 percent of your turnover and they just stop doing business with you overnight that is catastrophic anyone has ever done business with walmart knows what this looks like but also everyone who's still putting videos on youtube as they've cranked down the compensation to creators knows what this looks like it's very hard to escape a powerful buyer but in terms of consumer lock-in there's many different ways of accomplishing it this is i think the primary source of innovation in silicon Valley is finding ways to lock in end users.

5:13You can do it in concert with the state. Since 1998, America has had a law called the Digital Millennium Copyright Act. And Section 1201 of the DMCA establishes a felony punishable by a five-year prison sentence and a$500 ,000 fine for defeating an access control. And so if there's software in a device, and the only way to modify it is to bypass something that says, like, don't modify the software. The act of modifying the software, even if you don't infringe anyone's copyright, even if you don't violate anyone's law, is a felony that you can go to jail for five years for. And so this is how you get locked in with, say, printer ink, right?

5:49So the companies have merged to a cartel. Four giant companies control all the printers. They have fitted the printer cartridges with security chips that are a software lock and access control. And it checks to see whether you're using an OEM cartridge with the original ink in it, or whether you've refilled or bought a third-party ink cartridge. And what this does is it creates a switching cost where if you want to leave your printer behind and go to one that takes third-party ink, if you can find it because the cartel have crushed those printer companies, you have to surrender all the ink that's remaining in your other three toner cartridges and the cost of the printer as well.

6:26And so a lot of users don't switch because at any given moment, the kind of economically rational thing is to stick with the printer. And today, printer ink is the most expensive fluid you can buy as a civilian without obtaining a government permit. But it's not just, you know, this kind of technological or state lock-in. You have Uber, which was able to violate the black letter of antitrust law by doing predatory pricing, selling goods below cost in order to remove competitors from the market. They lost 41 cents on every dollar they made for 13 years, and they crushed all potential competitors except for an also-ran, which is Lyft.

7:03And so in many places now, the bus isn't coming, there isn't a regular taxi company, and it's just Uber. And so Uber raises the price. And what are you going to do? So you mentioned Facebook. Why don't you talk, whether it's about Facebook or another platform, sort of step-by-step, how a platform, we fall in love with it for good reason, and then something happens. So talk in more detail about how a platform goes from great stuff to crappy stuff. So when Facebook started off as a public service, they had a problem, which was that everyone who could have been using Facebook and who wanted social media already had a social media account on another service called MySpace.

7:42And so they made a pitch to them. They said, come to Facebook. We are like MySpace, except that we will never spy on you and we'll never show you anything you didn't ask to see. So that was stage one. So as those end users piled into Facebook, they did Facebook's work for them. They found a way to lock themselves in. And they did so through something economists call the collective action problem. When there's 200 of you and you're all stuck to Facebook. And some of you are there because that's where the people have the same rare diseases that meet. And some of you are there because that's how they plan the carpool for the league their kids are in.

8:15And some are there because they emigrated and that's the only way to stay in touch with the people they left back home, and some are there because that's how they find their audience or their customers, then the fact that you are dissatisfied with Facebook has to overwhelm the fact that you are very much dependent on your friends. And so, so long as you love your friends more than you hate Mark Zuckerberg, Mark Zuckerberg can make things worse for you in order to make things better for another group of users. So that's where stage two starts. we draw down some of the value that has been given to end users in order to allocate it to a different group of users the business customers in facebook's case that was publishers and advertisers so mark zuckerberg violates his promises and he goes to the advertisers and he says do you remember when these rubes signed up for facebook we told them we weren't going to spy on them the actual fact is we spy on them with every hour that god sends and for a remarkable small amount of money, we will target ads to them with incredible fidelity.

9:13We will devote enormous resources to make sure that when you give us a dollar to show an ad to a specific kind of user, that is the kind of user and they definitely get shown the ad before you get built. So the business customers, they pile in too, and they become dependent on those end users because very quickly, Facebook becomes a critical source of business to their firms and they can't replace them overnight and they can't afford to go away. So that's stage two. In stage three, Facebook exploits the fact that business customers and end users are all locked together. And so it starts to withdraw value from both of them in order to allocate it to shareholders and investors.

9:50So if you're an advertiser, you find that the price of advertising has gone way up, but the fidelity of ad targeting has gone way down. So advertising costs go up, ad fraud goes through the roof. In 2017, Procter and Gamble zeroed out their programmatic advertising spend. They had been spending$200 million a year on surveillance ads, programmatic ads. And when they went to zero, they saw a 0 % drop in sales because to a first approximation, P &G's ads were either not being seen by anyone, right? It was just being consumed by ad fraud or they were being seen by the wrong people. They were just being misdirected by kind of indifferently tended ad targeting systems.

10:30Publishers also faced rising costs. So they had to put longer and longer excerpts just to be shown to their own subscribers and to get recommended that the excerpts had to be longer still and nothing would show up if they put a link back to their own website and Facebook said, oh, we can't tell if those are malicious links with the effect that they become commodity backend suppliers to Facebook, right? The stuff they post is perfectly substitutive for the material on their own website. Meanwhile, end users have found like that the share of content that they've asked to see in their feed is almost non-existent to create a void through into which Facebook can stuff things people will pay to show them to see.

11:08That's the end of it. Stage three and shitification. You know, this is great analysis. And, you know, it's a little bit like Clay Christensen, right? With, you know, disruption theory that's very specific. And your kind of analysis is very specific to what happens with platforms. I'm wondering, to what extent, you know, should our listeners care? I mean, I think most of us have a deal with the internet where we say, all right, I'm not comfortable with every aspect of it. I'm maybe not comfortable with the surveillance aspect of it, but it's working for me, right? I mean, there's some trade-off of convenience versus the negative stuff.

11:43So, yeah, I wish it were better, but it's working fine for me. Why should our listeners care? Well, I think increasingly it's not working for people. So, in a way that I think most people can relate to, Google with a 90 % search market who were just allowed to go on by a federal judge given permission to go on paying Apple$20 billion a year not to enter the search market with a competitor that might impose discipline on them, even having lost an antitrust case, I think we all understand that our gateway to knowledge on the internet kind of sucks now. But there are ways that this becomes much more pointed.

12:16So nurses, contract nurses, are very common in America because hospitals are trying to do union avoidance. And it used to be that contract nurses were supplied by local firms, several local firms in every market. And now they've been replaced by, depending on how you count, three or four giant apps, each of which calls itself Uber for nurses. And because the monopolies capture their regulators, those giant apps are able to violate the privacy of those nurses in ways that shifts giant amounts of money from labor to capital. So before a shift is given to a nurse, the app buys their credit history from a data broker.

12:55Data brokers are unregulated in America. Under Biden, we got a rule regulating them. Under Trump, that rule was rescinded. And the last time Congress gave us a law about this, a consumer privacy law was in 1988, when the Video Privacy Protection Act banned video store clerks from disclosing your VHS rental history. We haven't had a single new consumer privacy law since then. And so they're able to buy the credit history of nurses, and they are looking for how much credit card debt the nurses are carrying and how delinquent it is. And the more economically desperate you are, the lower the wage you're offered.

13:29And so this is very bad for nurses, clearly. But if you're getting a catheter inserted today by a nurse who had to drive Uber till midnight the night before in order to make rent and couldn't afford breakfast this morning, that's bad for you too. too. So doesn't everything get worse? I mean, we're looking at these platforms and say, man, it's getting worse. Is this really unique to internet platforms? Obviously, the details are specific to them. But isn't this things get worse over time or capitalism leads to exploitation over time? Is this really unique to tech companies and what they've created?

14:05There are sources of discipline on firms that used to operate on firms and that I argue have ceased to operate on firms. So historically, firms had to worry about competitors. But we have seen since the Carter years, a drawdown of antitrust law, with the exception of, you know, late Trump one and the Biden years where we saw a revival of it. And that has allowed firms to just buy each other and eliminate competitors. So they don't have to worry about you leaving. So, you know, the most obvious example of this would be Facebook buying Instagram. And so we don't have competitors as a source of discipline.

14:37And when firms, when they cartelize, right, when there's only like five of them or four or three or two or one, you know, they find it really easy to come to an agreement about what their lobbying posture is going to be. Think of like Uber and Lyft agreeing to spend$225 million collectively on Prop 22 here in California that formalized the worker misclassification they do to treat employees as contractors. You know, these companies may be competitors in some sense, but not when it comes to talking to regulators or getting policy over the line. And so all of that stuff, that acts on every firm.

15:11One company called Luxottica Essilor has bought every brand of eyeglasses you've ever heard of and every place you buy glasses from Sunglass Hut to LensCrafters. And they've raised the price of glasses over the last 10 years. So they've gotten worse. So what's the difference between glasses and computers or technology? It's that there were other forces of discipline that worked on tech platforms and that those forces of discipline that were tech-specific also went away. And those two forces, one is that the tech workforce was historically very powerful because they were scarce. And a lot of them, I call them Tron-pilled.

15:42They fought for the user. Tech worker scarcity has gone away. We saw half million layoffs in the sector in the last three years. And then the other one is a very interesting one called interoperability, which is making a technology that makes another technology work better. That used to be the order of the day. If a company made its technology worse, someone else would make a technology that made it better and steal your customers from you. But the growth of IP law has neutralized that as well. And so the erosion of discipline has led to the worsening of things. It's not the iron laws of economics or the great forces of history.

16:14It's specific policy choices that were predicted to have this outcome and that did have this outcome. You don't write much in the book about AI. And I think you're right that Google search is, we would have imagined several years ago that Google search would be much better than it is. And in your book, you talk about some of the reasons why it's intentionally not as good as it could be. But AI, for all its limitations, for all its factual mistakes, it's pretty good. I think AI search is pretty good and certainly better than sort of classic Google search at this point. Do you think AI providers are likely to go through the same process or that maybe AI gives us an alternative, gives us agency amid some of these problems here?

16:54I think that we have to understand that the investment in AI, which is extraordinary, has been driven by exactly one thing, and it's not making cool pictures. It's not AI search. It's the prospect of displacing labor. When Gartner says there's$13 trillion in AI, what they mean is that there's$13 trillion in wages that can be shifted from labor to capital. That's foundationally what they're talking about. And while there's lots of other stuff going on, I think that we have to keep our eyes on the prize. And I think that it's important to note that whatever merit AI has for search or anything else, it's actually not very good at doing people's jobs.

17:32Like AI salesmen are much better at convincing a boss to fire a worker and replace them with an AI that can't do their job than AI is at doing that worker's job, partly because they're pushing on an open door. Bosses would love to reduce their wage bills. That is like the first characteristic of being a boss is to find ways to reduce your wage bills because it's a input that is something that feels like you should be able to reduce it through automation as to like whether ai is going to make this better or worse i think mostly it's going to make it worse like one of the use cases where ai really is very good is surveillance pricing right it's really good at figuring out how to tighter an offer on a per user basis whether that's a wage offer or a pricing offer to find the minimum you're willing to accept as a worker and the maximum you're willing to pay as a customer.

18:22I think it's just a pure transfer from consumers and workers. They say that every day your business is late to AI, you fall two days behind. But how do you keep up? The competition is only moving faster. Fortunately, there's NetSuite Next. NetSuite is customized for a wide range of industries, so it supports the way your business truly works. For the first time ever, you can try NetSuite Next for free. If your revenues are at least in the seven figures, go to netsuite.ai slash ideacast. Built for every industry, ready for every boardroom. netsuite.ai slash ideacast.

19:03Let's get to the part of this conversation that is, all right, so what do we do about it? There are various approaches. There's what policymakers can do. There's what users can do. There's what businesses that are part of these two-sided platforms can do. How about we start with businesses who sort of appreciate your argument and say, yes, we've lost power, we've lost agency, we're not happy. I mean, your P &G example, we're spending all this money and getting nothing in return. What can business do to try to change all of this? Well, I have to say, I don't think there's much businesses or individuals can do.

19:33This is a policy question. I mean, what can businesses do? They can shift the policy landscape. One of the things we have to recognize is that Chamber of Commerce is extraordinarily bad at representing the interests of SMEs. and often lobbies for things that SMEs owners are extremely hostile to in order to please its largest members. And those largest members are predatory upon SMEs. But there are some large enterprises that have taken big swings at changing the policy landscape. And the best example I can think of here is Epic, makers of the video game Fortnite. Epic has sued both in the EU and the US, Google and Apple with mixed success, but some stunning successes, including a federal case against Google rather for antitrust violations can benefit every SME that uses those platforms having 30 cents taken out of every dollar they make in processing fees.

20:25Often the local chambers of commerce are better and they need to find industry associations that don't incorporate the monopolists that prey on them and that are seeking to collect rents from them because they they have these choke points in the economy because you can't clear the choke point just by having a better product. If you do retail business and you want to reach customers in America, 90 % of affluent households have Prime and 90 % of Prime households start their search on Amazon if they find what they're looking for. They don't shop anywhere else, which means that you must be on Amazon to reach those customers.

20:57Amazon's taking 45 to 51 cents out of every platform dollar generated by third-party sellers. They take so much out of sellers that they don't have to pay anything for Prime for their own package fulfillment, right? They have 100 % subsidy on Amazon package fulfillment. How many businesses can really operate on a 45 to 51 % margin? And on top of that, Amazon has now, it used to be an explicit, now it's a tacit most favored nation principle, where if you sell more cheaply anywhere other than Amazon, Amazon buries you in the search results on page 11 million, which means that if you raise your prices on Amazon to make up for the 45 to 51 cents that you're spending at every dollar in platform fees, you've got to also raise your prices at Walmart, Target, and your warehouse store.

21:43Otherwise, Amazon will effectively delist you and then you won't reach 90 % of American consumers. You can't fix that by having a better product or better product messaging or better pricing. The only way you can fix that is with private rights of action in antitrust law and industrial associations that back them. And are you optimistic that any of that could happen? You and I know the U.S. best, you know, in the U.S. in this climate? Well, the U.S. has certainly done a lot of backsliding. For four years under Biden, we had a lot of focus on SMEs and fairness for SMEs at the expense of these big rent-seeking platforms.

22:19And that's all been rolled back.

22:24What's happening that's very interesting, though, is that under the last years of Trump one and under Biden, and I know you want to talk about America, but internationally in Canada, the EU, Australia, Japan, South Korea, and China, we've seen this really muscular new wave of enforcement against large firms since like 2019. And political science has no explanation for it because it's a bedrock of political science that if you examine policy outcomes, that they universally and exclusively reflect the preferences of the largest firms and the richest people. It literally doesn't matter how popular something is with the public.

23:02If billionaires don't like it, it never happens. And this is kind of the first time that's happened in generations. And so something amazing is happening in our political landscape. This is, you know, it's like gravity started working in reverse, and no one's noticed. And no one even has investigated the causes of it. I am both baffled and heartened by this because something has changed everywhere in a way that no one can explain, and that is really to the betterment of everyone who wants a fair and more open society, even as the outward signs are getting more closed and less fair. This tailwind, which is blowing so ferociously in the sails of policymakers all over the world, coming from somewhere.

23:45It's coming, I think, from if you're in finance, you'll know Stein's law. Anything that can't go on forever will eventually stop. It's coming from having reached the limits of rent extraction and neo-feudalism. And there just being some inchoate force that's changing things. You've studied technology and you've studied the people who own the big technology firms. I still don't entirely understand why some of these very idealistic people who created technologies, in fact, to make the world a better place, to find the source of all knowledge or to connect people. They brought labor in who were part of the mission.