Competition-proofing

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Apart from getting started in the midst of one of Silicon Valley's regular downturns, another great thing about the beginnings of Nvidia was that instead of insisting on the "minimum viable product" our VCs, Sutter Hill and Sequoia, gave us the time to develop a real architecture for a family of chips. It enabled us to get an amazing amount of functionality into a half-micron gate array; I/O virtualization, a DMA engine, a graphics processor that rendered curved surfaces directly, not by approximating them with triangles, a sound engine and support for game controllers. As I write, after a three decade-long history of bringing innovations to the market, Nvidia is America's third most valuable company.

I've written several times about how in pursuit of a quicker buck, VCs have largely discarded the slow process of building an IPO-ready company like Nvidia in favor of building one that will be acquired by one of the dominant monopolists. These VCs don't support innovation. Even if their acquisition-bound companies do innovate in their short lives, their innovations are rarely tested in the market after the acuisition.

Below the fold I discuss a new paper that presents a highly detailed look at the mechanisms the dominant companies use to neutralize the threats startups could pose to their dominance.

Techno-feudalism

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Two of my favorite authors are making the same point. First, Kim Stanley Robinson in passing during a fascinating interview by Oscar Boyd and Akshat Rathi:

Capitalism is the name of a power relationship of the few over the many. It is a hierarchy. It is feudalism liquidified, where money has replaced land as the source of power, but there's still the powerful and there's still the weak, and there's still incredible inequality in the world system.

Second, in Autoenshittification Cory Doctorow writes:

In his forthcoming book, Techno Feudalism: What Killed Capitalism, Yanis Varoufakis proposes that capitalism has died – but it wasn't replaced by socialism. Rather, capitalism has given way to feudalism:

https://www.penguin.co.uk/books/451795/technofeudalism-by-varoufakis-yanis/9781847927279

Under capitalism, capital is the prime mover. The people who own and mobilize capital – the capitalists – organize the economy and take the lion's share of its returns. But it wasn't always this way: for hundreds of years, European civilization was dominated by rents, not markets.

Below the fold some discussion of this idea.

Anti-trust

Technology markets, and others that share their strong economies of scale, naturally tend to evolve into oligopolies, if not outright monopolies. Brian Arthur described the mechanism in 1994's Increasing Returns and Path Dependence in the Economy. This tendency has been supercharged ever since Richard Posner and George Stigler of the Chicago School got the Reagan administration to hamstring anti-trust enforcement. We see the result in technology and many other markets, dominated by a few giant companies devoted, in Cory Doctorow's memorable coinage, to enshittification:

Here is how platforms die: first, they are good to their users; then they abuse their users to make things better for their business customers; finally, they abuse those business customers to claw back all the value for themselves. Then, they die.

This process applies more broadly than just to platforms, except the part about dying. Below the fold I discuss a recent development that provides an opportunity for you to take action to push back against it.

Economies Of Scale

Steve Randy Waldman is a very interesting writer. He has a fascinating short post entitled Economies of scale in which he distinguishes four different types of "economies of scale". In reverse order, they are:

1. Insurance
2. Market power
3. Network effects
4. Technical economies

The effects of economies of scale in technology markets, such as storage media, digital preservation and cryptocurrencies, is a topic on which I have written many times, drawing heavily on W. Brian Arthur's 1994 book Increasing Returns and Path Dependence in the Economy. Below the fold I discuss Waldman's classification of them.

Venture Capital Isn't Working

I was an early employee at three VC-funded startups from the 80s and 90s. All of them IPO-ed and two (Sun Microsystems and Nvidia) made it into the list of the top 100 US companies by market capitalization. So I'm in a good position to appreciate Jeffrey Funk's must-read The Crisis of Venture Capital: Fixing America’s Broken Start-Up System. Funk starts:

Despite all the attention and investment that Silicon Valley’s recent start-ups have received, they have done little but lose money: Uber, Lyft, WeWork, Pinterest, and Snapchat have consistently failed to turn profits, with Uber’s cumulative losses exceeding $25 billion. Perhaps even more notorious are bankrupt and discredited start-ups such as Theranos, Luckin Coffee, and Wirecard, which were plagued with management failures, technical problems, or even outright fraud that auditors failed to notice.

What’s going on? There is no immediately obvious reason why this generation of start-ups should be so financially disastrous. After all, Amazon incurred losses for many years, but eventually grew to become one of the most profitable companies in the world, even as Enron and WorldCom were mired in accounting scandals. So why can’t today’s start-ups also succeed? Are they exceptions, or part of a larger, more systemic problem?

Below the fold, some reflections on Funk's insightful analysis of the "larger, more systemic problem".

Amazon Is Profitable?

Six years ago, in Two Brief Updates I first wrote about Benedict Evans' insightful analysis of Amazon's financial reports:

He shows how Amazon's strategy is not to generate and distribute profits, but to re-invest their cash flow into staring and developing businesses. Starting each business absorbs cash, but as they develop they turn around and start generating cash that can be used to start the next one.

He is now back with a similarly insightful analysis entitled Amazon's profits, AWS and advertising, which starts:

People argue about Amazon a lot, and one of the most common and long-running arguments is about profits. The sales keep going up, and it takes a larger and larger share of US retail every year (7-8% in 2019), but it never seems to make any money. What’s going on?

Below the fold, some details of Evans' explanation.

Lack Of Anti-Trust Enforcement

The accelerating negative effects that have accumulated since the collapse of anti-trust enforcement in the US have been a prominent theme on this blog. This search currently returns 16 posts stretching back to 2009. Recently, perhaps started by Lina M. Khan's masterful January 2017 Yale Law Journal article Amazon's Antitrust Paradox a consensus has been gradually emerging as to these negative effects. One problem for this consensus is that "real economists" don't believe the real world, they only believe mathematical models that produce approximations to the real world.

Now, Yves Smith's Fed Economists Finger Monopoly Concentration as Underlying Driver of Neoliberal Economic Restructuring; Barry Lynn in Harpers and Fortnite Lawsuit Put Hot Light on Tech Monopoly Power covers three developments in the emerging anti-monopoly consensus:

1. Apple and Google ganging up on Epic Games.
2. Lina M. Khan's ex-boss Barry Lynn's The Big Tech Extortion Racket: How Google, Amazon, and Facebook control our lives.
3. Market Power, Inequality, and Financial Instability by Fed economists Isabel Cairó and Jae Sim

The first two will have to wait for future posts, but the last of these may start to convince "real economists" because, as Yves Smith writes:

they developed a model to simulate the impact of companies’ rising market power, in conjunction with the assumption that the owners of capital liked to hold financial assets (here, bonds) as a sign of social status. They wanted to see it it would explain six developments over the last forty years. ... And it did!

Follow me below the fold for the details.

Contextual vs. Behavioral Advertising

In his New York Times op-ed entitled What if We All Just Sold Non-Creepy Advertising? Gabriel Weinberg, founder and CEO of DuckDuckGo (Jack Dorsey's and my default search engine), draws a clear distinction between the two types of Web advertising:

There is no reason to fear that sites cannot still make money with advertising. That’s because there are already two kinds of highly profitable online ads: contextual ads, based on the content being shown on screen, and behavioral ads, based on personal data collected about the person viewing the ad. Behavioral ads work by tracking your online behavior and compiling a profile about you using your internet activities (and even your offline activities in some cases) to send you targeted ads.

He argues that the creepiness of behavioral ads isn't necessary for sites to make money from ads. Below the fold I look at the evidence that Weinberg is right.

Twitter Fails Security 101 Again

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On July 15 the New York Times reported on the day's events at Twitter:

It was about 4 in the afternoon on Wednesday on the East Coast when chaos struck online. Dozens of the biggest names in America — including Joseph R. Biden Jr., Barack Obama, Kanye West, Bill Gates and Elon Musk — posted similar messages on Twitter: Send Bitcoin and the famous people would send back double your money.

Two days later Nathaniel Popper and Kate Conger's Hackers Tell the Story of the Twitter Attack From the Inside was based on interviews with some of the perpetrators:

Mr. O'Connor said other hackers had informed him that Kirk got access to the Twitter credentials when he found a way into Twitter’s internal Slack messaging channel and saw them posted there, along with a service that gave him access to the company’s servers. People investigating the case said that was consistent with what they had learned so far. A Twitter spokesman declined to comment, citing the active investigation.

Below the fold, some commentary on this and other stories of the fiasco.

Inefficiency Is Good!

Back in 2015 I wrote Brittle systems and Pushing back against network effects, among other things about the need for resilient systems and the importance of antitrust enforcement in getting them:

All over this blog (e.g. here) you will find references to W. Brian Arthur's Increasing Returns and Path Dependence in the Economy because it pointed out the driving forces, often called network effects, that cause technology markets to be dominated by one, or at most a few, large players. This is a problem for digital preservation, and for society in general, for both economic and technical reasons. The economic reason is that these natural but unregulated monopolies extract rents from their customers. The technical reason is that they make the systems upon which society depends brittle, subject to sudden, catastrophic and hard-to-recover-from failures.

Now, the pandemic has inspired two writers to address the bigger version of the same problem, Bruce Schneier in The Security Value of Inefficiency and Jonathan Aldred in This pandemic has exposed the uselessness of orthodox economics. Below the fold, some commentary.

Informational Capitalism

In The Law of Informational Capitalism, Prof. Amy Kapczynski of the Yale Law School reviews two books, Shoshana Zuboff’s The Age of Surveillance Capitalism and Julie Cohen’s Between Truth and Power: The Legal Constructions of Informational Capitalism to document the legal structures on which the FAANGs and other "big tech" companies depend for their power.

Below the fold, some commentary on her fascinating article.

The Death Of Corporate Research Labs

In American innovation through the ages, Jamie Powell wrote:

who hasn’t finished a non-fiction book and thought “Gee, that could have been half the length and just as informative. If that.”

Yet every now and then you read something that provokes the exact opposite feeling. Where all you can do after reading a tweet, or an article, is type the subject into Google and hope there’s more material out there waiting to be read.

So it was with Alphaville this Tuesday afternoon reading a research paper from last year entitled The changing structure of American innovation: Some cautionary remarks for economic growth by Arora, Belenzon, Patacconi and Suh (h/t to KPMG’s Ben Southwood, who highlighted it on Twitter).

The exhaustive work of the Duke University and UEA academics traces the roots of American academia through the golden age of corporate-driven research, which roughly encompasses the postwar period up to Ronald Reagan’s presidency, before its steady decline up to the present day.

Arora et al argue that a cause of the decline in productivity is that:

The past three decades have been marked by a growing division of labor between universities focusing on research and large corporations focusing on development. Knowledge produced by universities is not often in a form that can be readily digested and turned into new goods and services. Small firms and university technology transfer offices cannot fully substitute for corporate research, which had integrated multiple disciplines at the scale required to solve significant technical problems.

As someone with many friends who worked at the legendary corporate research labs of the past, including Bell Labs and Xerox PARC, and who myself worked at Sun Microsystems' research lab, this is personal. Below the fold I add my 2c-worth to Arora et al's extraordinarily interesting article.

Regulating Social Media: Part 1

It has become obvious that self-regulated social media are a threat to pretty much every country's national security. This is intended to be the start of a series looking at the range of suggestions as to how, at least in the United States, it might be done, including (I hope) at least these:

• How to Regulate (and Not Regulate) Social Media by Jack Balkin
• Bipartisan legislation would force Big Tech to allow interoperability with small competitors by Cory Doctorow
• The Good And The Bad Of The ACCESS Act To Force Open APIs On Big Social Media by Mike Masnick
• Testimony by Maciej Cegłowski to the Senate Committee on Banking, Housing, and Urban Affairs for their hearing on Privacy Rights and Data Collection in a Digital Economy
• A Framework for Regulating Competition on the Internet by Ben Thompson.
• A Better Internet Is Waiting for Us by Annalee Newitz

Below the fold, I start with the first of them.

Academic Publishers As Parasites

This is just a quick post to draw attention to From symbiont to parasite: the evolution of for-profit science publishing by UCSF's Peter Walter and Dyche Mullins in Molecular Biology of the Cell. It is a comprehensive overview of the way the oligopoly publishers obtained and maintain their rent-extraction from the academic community:

"Scientific journals still disseminate our work, but in the Internet-connected world of the 21st century, this is no longer their critical function. Journals remain relevant almost entirely because they provide a playing field for scientific and professional competition: to claim credit for a discovery, we publish it in a peer-reviewed journal; to get a job in academia or money to run a lab, we present these published papers to universities and funding agencies. Publishing is so embedded in the practice of science that whoever controls the journals controls access to the entire profession."

My only criticisms are a lack of cynicism about the perks publishers distribute:

• They pay no attention to the role of librarians, who after all actually "negotiate" with the publishers and sign the checks.
• They write:
  

  we work for them for free in producing the work, reviewing it, and serving on their editorial boards

  We have spoken with someone who used to manage top journals for a major publisher. His internal margins were north of 90%, and the single biggest expense was the care and feeding of the editorial board.

And they are insufficiently skeptical of claims as to the value that journals add. See my Journals Considered Harmful from 2013.

Despite these quibbles, you should definitely go read the whole paper.

Google's Fenced Garden

In the wake of Lina Khan's masterful January 2017 Yale Law Journal article Amazon's Antitrust Paradox, both anti-trust investigations of the FAANGs and anti-trust remedies have been consuming extraordinary numbers of pixels. Although the investigations cover all the major platforms, the discussion of remedies has tended to focus on Facebook and Amazon. Below the fold, I ask whether, assuming any of the multifarious investigations lead to anything other than cost-of-doing-business fines, any of the proposed remedies would be effective against Google. I apologize for the inordinate length of this post; it seemed that the more I wrote the more there was to write.