The Original American Tech Giants: November 12, 2017 Snippets
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This week’s theme: how the railroads 150 years ago were like tech platforms today. Plus eShares is now Carta as they expand their sights.
Last week in Snippets we introduced the topic of Big Tech versus Big Government: what happens when two different kinds of institutions with different kinds of power start to cause problems for each other. Our situation today has US lawmakers contemplating how to deal with the huge power of the tech industry and the second-order consequences like fake news, electioneering, and mass manipulation that they’ve enabled. We’re seeing an interesting power dynamic: tech companies’ power to influence versus the government’s power to compel. Other Big Tech versus Big Government — style clashes in the past, however, have dealt with different kinds of power and conflict. We’ll look at some of those over the next few weeks, and then return to our present day situation and see what we’ve learned.
We sometimes fall into rhetoric that “tech companies today have an unprecedented amount of power.” Well, their scale may be unique in history, but their power is certainly not. 150 years ago, a different breed of giant monopoly companies that wielded powerful new technology had an iron grip on the US economy, the government, and the very frontier of our expansion: the railroads. We don’t think of railroads today as “technology companies”, but back then they absolutely were: they represented a radically new way to accomplish more with less. Railroads unlocked economies of scale around cheap and abundant distribution, and our entire market economy got rearranged around it. No longer did each town need to have their own shoemaker, for example; now they could all be mass-produced in a single factory town in Massachusetts for far less money.
Railroads in the 19th century were truly a “platform technology”, in the same way we use the term today. Mining, manufacturing, goods distribution and early oil production were all critically dependent on the railroads to move their product from source to sale, and the fates of these emerging industries were in the hands of whichever railroad line served them. As the United States expanded westward, new settlements could get set up much more quickly when building materials and supplies could be imported by rail, allowing expansion to become “lightweight” on top of the railroads’ “heavy” infrastructure. The parallels here to tech platforms, especially cloud computing, are significant: just like starting an internet business became much easier with AWS and open-source software, founding a town on the western frontier became much easier with Union Pacific. You could plant a flag in the ground, ship in everything you need, set up the town, and move on to the next one.
As the critical platform infrastructure on which the frontier was built, the railroad companies could secure vast amounts of capital to fuel their growth, lock in profitable markets, and finance political campaigns to ensure favourable treatment in Washington. Customers shipping product on one of these railroads, unless their town was served by multiple lines, were absolutely powerless in the face of whatever shipping rates they opted to charge. This led to a paradox where ruinous rate wars in competitive settings (where major customers like John D Rockefeller’s Standard Oil could dictate shipping rates) inevitably led to price gouging in non-compettive settings (where powerless peripheral customers bore the brunt of the costs.) The similarities to today’s startups living or dying on the whims of Facebook’s algorithms, for instance, have not gone unnoticed.
Before long, political pressure — led by the Grange Movement of mobilized farmers — began to build on the federal government to do something to regulate the freight rail market and establish “just, reasonable and uniform rates”. In the 1876 case of Munn Vs. Illinois, the US Supreme Court upheld the power of the government to regulate private industries like the railroads, establishing the legal basis for the state to curb private industries’ power. But the case had little impact: the railroads ignored and defied any attempts to regulate prices, and shippers continued to bear the cost. (The Munn decision was eventually reversed anyway, in Wabash, St Louis and Pacific RR Co vs Illinois.) The subsequent establishment of the Interstate Commerce Commission, which actually did grant the government real power to intervene, gave regulators a bigger mandate — but they still lacked teeth. The problem was that enforcement was left to the courts, which was a fairly ineffective process: courts usually sided with the railroads. So the ICC could pass down judgements, but couldn’t actually levy fines or otherwise enforce its will.
What was going on here? We can think of this struggle in contrast to today’s standoff between Big Tech and Washington: the power dynamic between the railroads and the government wasn’t about competing influence, but rather about mutual coercion. There wasn’t as much subtlety to the railroad story: it was a matter of muscle, not influence or persuasion. In the short run, the railroads had the gold, so they made the rules. They, and they alone, could move the goods and products that the expanding nation needed in order to thrive. So the government’s power to act, although legally sound, was practically limited by the necessity of shipping goods at that moment. In the long run, though, regulation creeped in and encroached on the railroads’ autonomy, steadily and surely — partially as a consequence of sweeping trust-busting reform in the early 20th century, but also because of several financial panics and crashes that reorganized the landscape and took the incumbents’ power down a few notches relative to other industries.
To better understand what’s happening with tech companies versus the government today, we need a second example from the more recent past. Next week, we’ll look at another story with a different kind of powerful technology businesses from a few decades ago: the pharmaceutical, drug and tobacco companies, and their fight with the government over a different kind of power — the power to influence.
Elsewhere in the world:
New frontiers in molecular biology:
Problems on YouTube this week:
And problems in the cryptocurrency world (although that seems like every week, really):
Other reading from around the Internet:
In this week’s news from the Social Capital family, following their recent Series C financing, eShares has changed their name to Carta:
Why is this so noteworthy? As CEO Henry Ward points out, it’s more than just a name change — it’s representative of eShares outgrowing their original market and into a much broader, more ambitious mission.
“The investor criticism of eShares has always been “how big can the cap table market be?” It turns out much bigger than people thought. We live in a world where everything is owned by a person, or more commonly, a group of people. Startups, office buildings, rental homes, railroads, railroad cars, railroad companies, debt for those railroad companies, antarctic territories, farm equipment, rice patties, irrigation equipment for those rice patties, DAOs, ICOs, pharmaceutical companies, pharmaceutical patents … it goes on and on. Everything in our world is owned by a person or a group of people.
Humankind’s greatest financial invention was the Corporation. The Corporation made it possible for people together and share ownership at scale. That vehicle for shared ownership has made S-Corps, C-Corps, LLCs, and LLPs the dominant form of business creation in the modern era. And new forms of shared ownership are being created today with ICOs, DAOs and blockchain ownership ledgers.
Shared ownership is the thread that holds our economy and our collective productivity together. It is enormously complex: the size of our global economy and the total number of ownership claims on permanent things are unfathomably numerous and interconnected. But it’s also a very natural thing: in a way, it’s easier to think of the world’s collective ownership web as a fractal organism than anything else.
Take a look at this slide from eShares’ Series A slide deck, from back in 2014. They were a lot smaller than they were today, but you can see the unmistakeable beginning of a fractal network appearing before our eyes:
What’s in this graph? We see entities, we see businesses, we see investments, we see equity ownership. But if you go far enough back, you get to people. As Henry puts it: “If we drill far enough into the ownership graph, through the pensions and real-estate trusts and all the shared ownership vehicles, you eventually get to a person. You reach their retirement plan or savings account or option grant or even a simple title representing their ownership interest. This is how our society works. The leaf nodes of the ownership graph must be individual people.”
Three years later, the eShares ownership map has gotten so big they’ve outgrown their name, and become Carta as a result. The exciting thing is, they’ve only touched a tiny fraction of their total market: all of the people in the world, who are working hard towards owning a piece of something permanent and valuable. If you want to join them in their mission, they’re currently hiring for positions in New York, Salt Lake City, Seattle, Rio De Janeiro, and the Bay Area.
Have a great week,
Alex & the team from Social Capital