Elizabeth Warren’s gonna break everybody up: March 10, 2019 Snippets

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This week’s theme: most of the tech antitrust threats don’t really hold water, but one might: product development on Amazon’s third party marketplace.

Big news everyone! As you may have heard, on Friday morning Elizabeth Warren released a campaign statement (on Medium, naturally) outlining a new campaign pillar: big tech is too big, so we’re gonna break em up.

Here’s how we can break up Big Tech | Elizabeth Warren

In timely fashion, The Verge helpfully assembled three recent podcast interviews about Big Tech antitrust: from Tim Wu (who coined the term “net neutrality”, wrote The Master Switch, and as a new book on antitrust called The Curse of Bigness: Antitrust in the New Gilded Age), Ro Khanna (Silicon Valley’s congressional rep) and Lina Khan (the most interesting of the three, who we’ll hear about in a second.)

Three Vergecast episodes on breaking up Big Tech: Tim Wu, Ro Khanna and Lina Khan | Andrew Marino, The Verge

So what’s in here we need to know about? Aside from the introduction, which included some a pretty tenuous suggestion that the Microsoft antitrust saga is somehow for our being allowed to use Google instead of Bing today, and also some nonsense about VCs not wanting to fund startups anymore because Facebook was too scary (I, for one, would be mortified if they bought any of our portfolio companies for 19 billion dollars), there were two proposals in Warren’s post. One part was basically just a list of acquisitions she would direct staff to undo: pulling Whole Foods and Zappos out of Amazon (I mean, ok); Nest (who cares) and Doubleclick (whoa!!!) from Google, and of course ripping Instagram and WhatsApp out of Facebook. Really the notable part about these proposed de-mergers is that there appears to be effectively zero common theme behind why these specific mergers ought not to be allowed aside from “because their parents are big and they are villains now” as a unifying trait. However, the other part of her post was quite a bit more interesting, because it does address something we need to have a real conversation about. In her words:

[We will pass] legislation that requires large tech platforms to be designated as “platform utilities” and broken apart from any participant on that platform. Companies with an annual global revenue of $25 billion or more and that offer to the public an online marketplace, an exchange, or a platform for connecting third parties would be designated as “platform utilities”. These companies would be prohibited from owning both the platform utility and any participants on that platform. Platform utilities would be required to meet a standard of fair, reasonable and nondiscriminatory dealing with users. Platform utilities would not be allowed to transfer or share data with third parties.

Obviously, there are some problems here which is that effectively all large successful tech companies have platform capabilities that support one or more of their own products. (Are you going to ban Apple from putting its own apps on the App Store? Can Microsoft no longer sell cloud security software through Azure?) In general, this isn’t a good proposal, not by a long shot. But if you set aside the numerous edge cases here, there is one specific instance of self-dealing that a good number of smart people have decided ought to go under the microscope of antitrust legislation: Amazon’s third party marketplace.

The most interesting character here, who you should get to know if you haven’t already, is Lina Khan. Two years ago as while at Yale Law School she wrote a definitive argument for Amazon’s antitrust case in the Yale Law Journal, which has come to be adopted as the “reference case”:

Amazon’s Antitrust Paradox | Lina M Khan, The Yale Law Journal

Look, I’ll be honest, I don’t find a good chunk of this to be all that convincing. A lot of it is effectively: Amazon is really good at being a company; in fact so good that it has become too hard for regular businesses to compete with them. They know how to spend now in order to maximize future earnings. They know how to create customer demand and maintain customer loyalty. In short, the case for breaking up Amazon is effectively a case for “variety for its own sake”, rather than an a case for why Amazon is gouging its customers, behaving uncompetitively or otherwise deserving of antitrust; with perhaps an exception to be made in the eBook market where they do genuinely have what one would call a monopoly on distribution.

However! There’s a part at the end that’s actually important, and lays out the case of what is actually new about these internet platforms. This is the meaningful part of the argument, because it acknowledges that there is a new kind of coercive reality to the competitive environment, most visibly in e-commerce, that isn’t so much anticompetitive behaviour as it is something new, more like: “anti-creative”. It has to do with two things: 1) the notion of platform giants like Amazon competing themselves atop their own platforms, and 2) the idea that they gain an unfair advantage by doing so, not just in retail competition but in also product development and life cycle. She writes:

“Third party sellers using Marketplace recognize that using the platform puts them in a bind. As one merchant observed, “You can’t really be a high-volume seller online without being on Amazon, but sellers are very aware of the fact that Amazon is also their primary competitor.” Evidence suggests that their unease is well founded. Amazon seems to use its Marketplace “as a vast laboratory to spot new products to sell, test sales of potential new goods, and exert more control over pricing.” Specifically, reporting suggests that “Amazon uses sales data from outside merchants to make purchasing decisions in order to undercut them on price” and gives its own items “featured placement under a given search.”

Wait, wait, you might argue. Surely she can’t be serious that this is new; big retailers have had private labels for a long time! No one is arguing that Costco needs to get rid of Kirkland Signature. Furthermore, retailers have always used shelf space and product placement as a way of promoting one product over another, including their own brands. When Amazon does it we call it promoted advertising; when P&G does it we just call it business. So what’s the difference? Well, she goes on:

“It is true that brick-and-mortar retailers sometimes also introduce private labels and may use other brands’ sales records to decide what to produce. The difference with Amazon is the scale and sophistication of the data it collects. Whereas brick-and-mortar stores are generally only able to collect information on actual sales, Amazon tracks what shoppers are searching for but cannot find, as well as which products they repeatedly return to, what they keep in their shopping basket, and what their mouse hovers over on the screen. In using its Marketplace this way, Amazon increases sales while shedding risk. It is third-party sellers who bear the initial costs and uncertainties when introducing new products; by merely spotting them, Amazon gets to sell products only once their success has been tested. The anticompetitive implications here seem clear.”

Why could it be that observing third party sales is fair game, but observing customer intent more closely is not? Well, I think of it this way: bringing products to market today is much more customer-centric than it was a few generations ago. Knowledge of how customers act around your product — how they comparison shop around it, their completion versus abandon rate when it’s in their cart, how they find it, what they add to it — is a crucial aspect not just of selling products but of developing new ones as well, particularly the kind of products for which customers would pay premium prices. How your customers are acting isn’t just market data; it’s also product development data.

Part of the key to understand Amazon’s incredible competitive advantage is this: Amazon doesn’t have to guess at what products to build next; it already knows exactly what build from the signals it’s getting from customers. Of course, the reason why they’re getting these signals from customers is because other merchants are selling their own products on Amazon’s third party marketplace. These signals have tremendous value to Amazon. (This is true across Amazon generally: they know what Basics products to make based on 3PM sales; they know what new AWS features to make based on what companies are building middleware applications on top of it, and soon making third party Lambda functions). The key question I guess is this: is Amazon able to use it’s huge audience and distribution platform to effectively coerce its third party merchants into a raw deal? If you want to sell on our platform (where the customers are), you have to give us valuable product development data for free. The more free data we can get, the greater is our ability to build our own, cheaper versions of these products and continue to attract customers on our platform, and therefore maintain our coercive power over merchants. (Of course, they don’t advertise this, but it’s simply implied as being a cost of doing business there.)

The charge, then, is that Amazon’s behaviour is something new, which we can think of as anticreative. It means two things: If you’re selling on Amazon, then the returns to your creative effort and creative product development will accrue disproportionately to Amazon. But if you’re not selling on Amazon, then any creative effort and creative product development will genuinely be harder for you to do — because you won’t have access to the customers you need. It’s not about competition; it’s about creation, and Amazon’s ability to coerce you into developing new products with full knowledge that they will gain most of the benefit — but the alternative is worse. There’s a decent case to make that that’s bad!

This is also why I don’t really agree with the argument that “but Amazon is only a low single digit % of US retail.” Yes, but I’m pretty sure they are a much higher percent of sales for products that are early in their iterative development, particularly those being sold and developed online. That’s one of the biggest second-order changes of e-commerce: the internet didn’t just change product distribution, it changed product development as well. And that’s where I think the Amazon critics do in fact have a case to make.

Would this nuance hold up in court? Well no; there isn’t any “anti-creative” legislation to leverage that I’m aware of. Again, just in terms of raw sales numbers, Amazon’s sales are still quite a bit smaller than Walmart. But I do think that whether you love or hate Amazon, it’s good to acknowledge that something is indeed new about this third party marketplace conundrum. At some point, people will be motivated to intervene, whether with the old rules or not. It’s the coercion that people have such a negative reaction to. People know a funny thing when they see it, even if they’re not articulating it very well. So we’ll see what happens.

As a side note, I’d wager that Amazon could probably break itself up and be fine. You might, say, keep its original retail and logistics business (which would still remain the largest part) in Seattle, have AWS be headquartered in Washington DC near all its huge government customers, and have Media, Advertising and Finance (the first two being already quite successful and the third effectively inevitable at this point) be based in… ah right, never mind.


A personal plug: I wrote about Twitter. As someone who spends a fair amount of time on “the bad website”, from time to time I get asked by my normal (not in tech) friends what it is exactly that Twitter is. A lot of them tried it out and didn’t really understand it; some people still have Twitter accounts but use it mainly as a news source. Above all, I think people have a hard time understanding why Twitter can be such an uproariously funny place to spend time. So here’s my attempt to explain it. Note: has some parts that are mildly NSFW.

Why is twitter dot com, the hell website, so funny? | Alex Danco

Another topic I’ve been thinking about a bunch recently: the line that gets drawn between the “elite” tech employees versus the people in the trenches — whether it’s the sales and customer success teams sweating it out, or the independent contractors working on an online marketplace. Alexis Madrigal recently checked back in on the latter, looking at the past decade’s trend of “push a button on your phone and a person will show up and do X for you” businesses. Where are they now? Let’s find out:

The Servant Economy: checking in on ten years of Uber-for-X businesses | Alexis Madrigal, The Atlantic

Medical news and notes:

The war on prediabetes could be a boon for Pharma, but is it good medicine? | Charles Piller, Science

The brain that remade itself: how a child’s brain completely remapped itself after one sixth of it was removed | Andrew Zaleski

Second patient free of HIV after stem-cell therapy | Matthew Warren, Nature

Personalized medicine for real | Sarah Constantin

A story that was very frustrating, and gets more frustrating when you find out the details:

An insider’s look at why women end up on the cutting room floor | Ayah Bdeir

Erasing women in tech: how 60 Minutes ignored women’s voices, stories and expertise | Reshma Saujani

How did we get here? Well it started way back when:

Protecting the riches: tracing the history of locks and keys from ancient Egypt to the digital age | Eric Suni, Cryptomove Blog

A brief history of investment banking from medieval times to the present | Caroline Fohlin

Recurring narratives, true or false:

The persistent economic advantage of America’s suburbs | Richard Florida, CityLab

A new luxury retreat caters to elderly workers in tech (age 30 and up) | Nellie Bowles, NYT

Sarah Taber on the myth of ugly produce and food waste | Chavie Lieber, Vox

Other stuff from around the Internet:

Finalists for the Smithsonian annual photo contest | Smithsonian magazine

Global poverty decline denialism | Ronald Bailey, Reason

A memo from the chairman: Howard Marks of Oaktree Capital on writing and his thought process | Masters in Business with Barry Ritholtz

This is Silicon Valley: becoming part of the machine | Gloria Liou

“Fast Fashion” furniture and Instagram has given us a world of crappy couches | Hanson O’Haver, The Outline

Terra Nullius | Cory Doctorow, Locus

And, just for fun, happy SXSW:

SXSW as cool and as real as it gets, reports marketing associate | The Onion (an article they’re reposted every year since 2013)


In this week’s news and notes from the Social Capital family, not one but two great podcasts from Andrew D’Souza of Clearbanc:

Andrew D’Souza: Clearbanc, Capital and Canada | North Star Podcast with David Perell

The future of startup funding with Andrew D’Souza and Ali Hamed | Venture Stories with Erik Torenberg

I want to highlight one particular segment of Andrew’s interview with David Perell, because it speaks directly to something we’ve been saying for a little while and will keep saying about the state of funding small businesses and fast growing startups today.

(Lightly edited for clarity:)

I’ve seen some of the powerful things that venture capital can do. But more often than not I have seen what happens when your investors or your board members are not aligned with your company in the vision and what you’re trying to create. The tension that it causes and the amount of stress that it causes a founder to manage and to raise capital, and to manage a series of investors, how expensive equity is when your company is working, and how painful it is when it’s not working. So, I realized that there are not great options out there for entrepreneurs who got into it because they don’t want to work for anybody. They want to work for themselves and build what they want. But then they raise money and they’re working for somebody. So I think VC had started with this pretty noble vision around funding the future and technology that was going to move humanity forward. Let’s cure diseases, let’s explore space, let’s develop technology that’s really gonna move us forward, but it’s devolved into funding consumer products and applications. And it’s not even the R&D component of that, they’re just funding customer acquisition and it’s going to take you six months to break even on every new customer. So 40% of venture capital goes directly into Facebook, Google, and Amazon.

There’s definitely a place for venture capital because there’s a high risk level at the beginning of every company and multiple times throughout a company’s life. You’re going to go through periods of a lot of uncertainty, you’re developing a new product or entering into a new market, you’re doing something where you don’t really know if there’s an outcome there — that’s a good use of equity. Once there’s a level of certainty and predictability in your business, venture capital is a very expensive way to fund that uncertainty and fund that certain part of your business. The problem is, the other option has been debt but banks have not figured out how these companies work.

If you’re growing really quickly and your business model is focused on customer acquisition and time to break even, banks have historically said, “Well, that’s all great. Write me a business plan. But really what I’m going to look at is do you own your house? Can I take a second mortgage on your house? And can I take a personal guarantee?” … So they don’t really look at the success of the business, they just really look at what are the assets there. And venture debt firms are basically just looking at who are your VCs and let me take some warrants in your company. They actually have a product that you can’t really use because VCs either won’t let you or the venture debt lender can pull the capital if they don’t feel your businesses in the right direction. So there’s a lot of dynamics of soft power that they use to limit their risk. But what it really means is, you can’t actually use the product. So debt has not actually solved this problem. And equity is a very expensive way. Both of them take a ton of time. And so we’re like let’s create something new. Let’s create a new funding mechanism that’s not equity, that’s not debt. We want to be aligned with the company. We want to set ourselves up for a revenue share and basically fund that growth.

We got a lot of clarity when [my cofounder Michelle Romanoff joined the show Dragon’s Den, which is the Canadian version of Shark Tank], because all of these entrepreneurs would come on the shows and be like, “Hey, I’ve developed this new widget, this new cell phone case, and it cost me $10 to find the customer on Facebook, I sell it for $50, and it cost me $10 to make it. So I get a 30% margin.” It’s great. But do I really want to own 20% of the company today? It’s a family owned business. Do they ever want to exit their company? Maybe not. But can we give them $100K to go buy more Facebook ads and scale the business? Sure. So we started structuring these revenue share sort of royalty deals, and it worked really well. And it was really easy to negotiate. It wasn’t a long term commitment. It was like 6 to 12 months typically. And we’d fund them, they grow and then either fund them more or not.

The amount of money they pay back to us is capped. So it’s usually it’s between six and 12%. So they always know — for every hundred thousand dollars we give them, they’re only paying a $6,000 back. No other — whether it’s a mortgage or equity investment — has this. You have no idea how much you’re actually gonna pay them. I think that’s one of the more interesting things is people will raise a bunch of money. And then everybody celebrates. I’m like, “Do you know how much money you have to give back?” You don’t get it for free. They expect you to give multiple times that back. And you rarely ever know how much you actually end up having to give back. And the faster growing the more successful your company is, the more expensive the capital is.

It’s always great to be aligned with entrepreneurs like Andrew who think the same way we do. If you haven’t checked out Clearbanc, please do. They’re doing some pretty incredible work to help create the future of small business funding, and their team culture is one we like to get behind. They’re currently hiring for a number of different roles in Toronto, so if you or someone you know is looking, please send them Clearbanc’s way.

Have a great week,

Alex & the team from Social Capital

Social Capital

A place to share news, notes and points of view

Snippets | Social Capital

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Weekly news and notes from the Social Capital family

Social Capital

A place to share news, notes and points of view

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