How The Narrative Of Google And Facebook Came Undone In 2017

Written by Howard Yu

net neutrality
Executive Chairman Eric Schmidt of Alphabet Inc., Google’s parent company. Schmidt recently announced stepping down from his role as the executive chairman of Alphabet’s board of directors. Photo: Bertrand Guay/AFP/Getty

It has been a tough year, full of bad news, but none of it exposes tech giants more than the latest FCC ruling before Christmas.

It’s hard to think of an industry that has collectively squandered its goodwill faster than those from the Silicon Valley.

It all started innocuously enough with the technology council created by President Trump, with Peter Thiel—cofounder of PayPal—becoming a top adviser who marshaled Tim Cook from Apple, Jeff Bezos from Amazon, Sheryl Sandberg from Facebook, Satya Nadella from Microsoft, Ginni Romety from IBM, Elon Musk from Tesla, Eric Schmidt and Larry Page from Google, and Brian Krzanich from Intel inside Trump Tower for a tech submit last December.

Exactly what was transpiring behind closed doors was unclear, since Steve Bannon, Ivanka Trump, and Jared Kushner were also behind that same closed door. What’s clear was that Trump thought of Peter Thiel as “a very special guy” and had made his 2014 best-selling book “Zero to One” a must-read, and it served as “something of a Bible” for Trump campaign staffers.

Staffers were told that “competition is for losers.”

“If you want to create and capture lasting value, look to build a monopoly,” advises Thiel. The Wall Street Journal reprinted the book excerpt; Stanford University invited Thiel to share business tips by teaching a class, CS 183: Startup.

What has roiled Silicon Valley has nothing to do with corporate performance. In 2017, the Dow set an all-time high 70 times, adding 5,000 points in a calendar year for the first time ever. Leading the pack as the world’s most valuable companies are Apple, Google, Amazon, and Facebook. Twenty years ago, the most valuable were Exxon, General Electric, Citibank, and Walmart. Data is the new oil. Online footprint trumps offline real estate.

But where money is abundant, reputation is scarce. When tech giants exert a firmer grip over the money-making machine, they lose control over the broader narrative. A Wall Street Journal op-ed reads, “Google-Facebook Duopoly Threatens Diversity of Thought.”

“Forget AT&T. The Real Monopolies Are Google and Facebook,” says another in The New York Times.

“Big Tech and Amazon: too powerful to break up?” asks the Financial Times. The conservatives accused Facebook of political bias by routinely suppressing conservative news; the liberals saw Facebook as a festering source of fake news; academics worried over the ad-powered internet monopolizing not only our pockets but our most private inner lives as well: our sustained attention, and therefore, our souls. And because Mark Zuckerberg didn’t want Facebook to become an “arbiter of truth,” he refused to call it a media company, which leaves the public with a question hanging: Why do these high-tech octopi scramble to get inside our heads? Competition is for losers. Build a monopoly.

The timing couldn’t be more unfortunate. Twenty years ago, Larry Page and Sergey Brin founded Google with a motto: “Don’t be evil.” The motto was officially removed in 2016. At Facebook, what was once the embodiment of an adolescent boldness, “move fast and break things,” the founding mantra forces regulators to reckon what the company is going to break next. History does tell us that when companies seek too hard to build a monopoly, they will eventually be regulated like a monopoly. It was thirty years ago, on the first day of 1984, that the old U.S. telephone system, Ma Bell, broke apart.

The case began in 1974 as the communication giant—with $150 billion in assets, $70 billion in revenues, and a million employees—lost government backing and was charged under the Sherman Antitrust Act. Out of the breakup came the seven Baby Bells, which, through a decade of splitting and merging, would give rise to Verizon, AT&T, and CenturyLink. But the breakup also broke into Bell Labs—“the idea factory,” “the crown jewel,” “the ghost of invention” behind Ma Bell. What was once a highly vaulted, jealously guarded research department in New Jersey was now forced into the open. The exodus of researchers and the seepage of intellectual properties, ironically and importantly, had hastened the development of the entire semiconductor industry. Fairchild Semiconductor Corporation, which gave rise to Intel, which in turn began the digital age spurred further still by Google, could not have started without the demise of its East Coast progenitor. Without Bell Labs, there would be no Silicon Valley. From Palo Alto to San Jose, it would have been like Napa Valley.

I mention all this because what’s good for a corporation may not be best for innovation at large; what looks disastrous for a single firm can be a boom for entrepreneurial activities. It is worth mentioning that at a time when S&P is hitting an all-time high, and when Apple is on the way to becoming the first trillion-dollar company in the history of mankind, more businesses are dying than are being born. According to a study by the Kauffman Foundation, a think tank known for its work on entrepreneurship, the number of companies less than a year old declined as a share of all businesses by nearly 44 percent between 1978 and 2012, with those declines sweeping across industries, including tech. And so the rollback by the FCC on net neutrality also deserves a special mention as 2017 draws to a close, for reasons both substantial and symbolic—symbolic because of the public anguish over disadvantaging the disadvantaged, substantial because the biggest losers could, in fact, be Google and Facebook.

The concept of a “neutral” internet that guarantees equal access by everyone is of course as old as other utility infrastructures: rail lines, highways, electricity lines, and aqueducts. That no broadband providers—Verizon, AT&T, and CenturyLink—can deliberately slow down certain websites or speed up others means that the internet service is flat: there is no fast lane. When traffic mounts and get congested, everyone slows. You can’t pay your way out, for this is how a democratic, open internet is supposed to work. It had been said that a democratic internet is the foundation of the “democratization of entrepreneurship.” Thanks to guaranteed access, we have today some very successful startups, like Airbnb, Etsy, Foursquare, Pinterest, Shutterstock, Square, and Vimeo, which successfully disrupt the industry status quo, which in turn keeps our economy vibrant and continually renewed.

And yet, content discrimination and selective display favoring those who can pay have been with us as long as we can remember. How else do Google and Facebook make money when you and I are using their services for free? In 2016, advertisers like Coca-Cola, P&G, and countless startups were paying Google some $63 billion for online advertising. Countless companies were paying Facebook some $26 billion in ad revenues. If Airbnb had not been buying ads online during its early days, we wouldn’t notice its website, no matter how fast it gets loaded on our smartphones. Building a successful startup depends as much on the internet speed as it does on access to consumers’ eyes. Controlling over 70 percent of all internet traffic, Google and Facebook are the arbiters of our eyes, even though their “ad rank” and “news feed” algorithms are perpetually shrouded in mystery. No one knows how and why certain posts perform well while others don’t. Competition is for losers. Build a monopoly.

The great irony of the FCC’s decision to kill net neutrality is that it could restrain the ability of Google and Facebook to make as much money as they are making today. Suppose Verizon and AT&T did decide to charge Instagram (which is owned by Facebook) or YouTube (which is owned by Google) a “toll fee” to display their content at high speed. There is little that Google and Facebook could do, other than paying up the tolls. Failing to do so would risk losing traffic to an alternative video-hosting site like Vimeo, which in turn would discourage advertisers like Coca-Cola, P&G, and countless startups from buying ads on YouTube. Google could recover those charges by increasing the cost per click in AdWords, but doing so would sway advertisers to switch over to Facebook. Since price fixing and cartel forming are outright illegal, in this new setting, money would likely flow back from Google to broadband providers.

None of these issues should matter unless you are shareholders of Google or Facebook. They matter to us only because they change our worldview. As long as I remember teaching in a business school, academics have held Silicon Valley innovators with such high regard that anything less than “being disruptive” is not worth discussing. Telecommunication companies were routinely the laughing stock, the builders of “dumb pipes” and broadband infrastructures, who failed to monetize their own endeavors. And yet for all the talk by innovators about “moonshot projects,” “BHAGs—big hairy ambitious goals,” or “10X improvement,” these can’t really be done without a deep pocket.

The deepest risk of the FCC’s ruling thus comes down to exposing the biggest Silicon Valley myth: Are Google and Facebook profitable because their managers are smarter than everyone else, or did they achieve a monopolistic position by accident because others in telecommunication were simply not allowed? This is where the narrative may not hold.

 Posted with permission of Forbes Media LLC

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