The Curious Case For Breaking Up Tech Giants

There’s no question that the world’s weather patterns are undergoing a massive change.

In the last few months alone, we’ve seen snow in Rome and three powerful nor’easters in Boston in the space of two and a half weeks — with some forecasts predicting a fourth this week. 2017 was the most destructive hurricane season in 82 years, with Harvey, Irma and Maria pummeling parts of the U.S. and the Caribbean, leaving tens of billions of dollars in damage in their wake. In Sept. 2017, more than 230 people lost their lives when Mexico City was struck by a 7.1 magnitude earthquake.

To name but a few.

This must all be because Beyoncé and Jay-Z had twins in July.

Think about it — did any of this happen before they had those twins?

It did not.

Those twins were born July 2017. All of these bad things happened after that.

Cause and effect.

Their twins. Our really, really bad weather.

I’d say there’s about as much of a correlation between our bad weather and the birth of those cute little twins as there is between Google, Facebook, Apple and Amazon’s fortunes getting bigger and middle class wages getting smaller.

Yet, that’s the claim being made by Scott Galloway — serial entrepreneur and adjunct faculty member at the Stern School of Business who wrote a book, participated in numerous TV interviews and composed a 7,000-word article in Esquire saying just that.

His thesis is based almost entirely on what statisticians call spurious correlation — inferring cause and effect from the seeming correlation between two unrelated things. A famous one is the correlation between sunspots and murder rates — there is none.

Galloway’s narrative asserts that “the four” — Facebook, Apple, Amazon and Google — should be broken up.

And that we should do that not because they’re tax evaders or evil — all things he said they, like all of us, are.

And not even because they’re job destroyers, which he said is the natural consequence of innovation, and innovation is goodness.

But because not breaking them up throws cold water on the American dream — which is to work hard, save money, be prosperous and even become a millionaire, as he told CNBC in a recent interview.

So, as capitalists, he said, it’s now time to “oxygenate” the economy and “prune [the] firms [that have] become invasive, cause premature death and won’t let other firms emerge.”

His premise knits together a series of storylines that regular readers of PYMNTS are quite familiar with:

That the Amazon Effect on retail, despite the company’s 4 percent share of it, is real and that it uses its diversified sources of revenue, like Amazon Web Services, to subsidize its retail business at the expense of traditional retail.

That Google dominates search and is using its search platform to monetize commerce, including its integration of Google Pay into apps and sites and the Chrome browser.

That Facebook seemed happy to ignore all the bad stuff taking place on its platform until it got caught — and that its mea culpas are too little, too late.

That Apple uses its closed ecosystem and the power of its brand to disadvantage others by denying access or imposing frictions on competing services like Spotify.

That the middle class is bifurcating — to the have’s and mostly to the have not’s as a result of jobs that are disappearing because technology and software is eliminating them.

The number of new businesses is at an all-time low.

But it is simply not right to say that the last two bullet points are the direct result of Amazon, Facebook, Google and Apple’s success over the last 10 to 15 years.

And that carving these companies into multiples of themselves would make things better for the middle class.

This topic is as complicated as it is controversial for four reasons.

“The Four” Don’t Have a Monopoly on Good Ideas

Before there was Google Pay, there were three earlier versions of Google payments, starting with Google Checkout in 2006.

They all died.

So did a lot of other things Google launched to boost its commerce offerings — as well as businesses it acquired to build commerce experiences around, such as Zagat. It found itself unable to compete with other, better-positioned competitors. And how about the purchase of Motorola and Google’s ambitions to become like Apple with its own hardware? The company bought Motorola and quickly dumped everything except the patents.

Who among you bought one of Amazon’s Fire Phones?

That would probably be none of you (except for you Amazonians reading this who were probably gifted one to use). The Fire Phone was quietly sunsetted before it even turned one, since in the iPhone era, no one wanted a phone with its own OS and no apps.

How about Facebook gift cards? A slam dunk for Facebook, right? You notice it’s your friend’s birthday and have the perfect opportunity to send a … physical gift card that they receive 10 days after the event. #Fail — along with just about every other commerce initiative Facebook has tried to ignite using its platform, starting with Beacon in 2007. (Perhaps our first clue that Facebook was playing perhaps a bit too fast and loose with consumer data.)

I saved the best for last — Apple and Apple Pay. You all know this story so well by now that you’re proficient on the details. But there wasn’t a person on the planet, save us here at PYMNTS, who back in 2014 didn’t say Apple Pay was going to crush everyone, marginalize the card networks and kill PayPal. It didn’t — and the jury is out on whether it ever will.

Since 1999, we’ve seen venture capitalists (VCs) pour hundreds of billions into new ventures in the U.S. There’s been no shortage of capital to start new businesses. There’s just been a shortage of ventures with new ideas that consumers and businesses find useful enough to try and then to stick with — ventures with a business model that can make money beyond the VC’s checkbook.

That’s not because the Big Four have or had the market locked so they never had a chance, but because a mobile-centric world creates a very different set of expectations around what consumers want from the businesses with which they interact.

To be relevant now, a business needs scale.

That’s just a fact of life in a world where consumers move easily between environments, ecosystems and devices — and where their inability to do so causes them to shift to a provider that can. Platforms, like the Big Four and others like them, give small players a chance to play big where they never ever would have had a chance to get to first base.

For example:

Brad Stone writes in his book, “The Upstarts”, that Airbnb got a huge boost in its early days by advertising on Facebook, targeting people with a house or extra room to rent out.

I ordered Vance Packard’s classic book, “The Hidden Persuaders,” written in 1959, from Amazon last week. They could fulfill it because a little bookstore I wouldn’t have ever found sells its books on the site. About 50 percent of items sold on Amazon now are from sellers just like him.

I just had to have a pair of fancy Italian shoes from a designer I’d never heard of after reading about them. A Google search directed me to an online merchant that sent them to me (from Italy) four days later. A tiny merchant I never heard of selling shoes from a designer I’d never heard of — but for Google.

Consumers Punish Firms That Don’t Meet Their Needs, Including The Four

The Cambridge Analytica fiasco on Facebook is the latest in a string of big missteps made by the social networking giant whose CEO, Galloway told Michael Smerconish on CNN on Saturday, is more powerful than Trump or Putin, since he’s organized more people than Christianity.

Facebook, he said, is the most successful commercial product in the history of mankind. That, of course, minimizes the importance of innovations such as the telephone or electricity, which, like Facebook, are technologies upon which innovations were developed and then commercialized. Call me crazy, but between Facebook, the telephone and electricity, I might not rank their importance to mankind in quite that same order.

Regardless, a funny thing has happened to Facebook ever since the emergence of fake news, Russian trolls throwing the 2016 U.S. presidential election and now the breach of 50 million Facebook user profiles without their permission: Consumers are disengaging.

Since all of these issues were made public, engagement on the social platform — in all demographics — has declined by 20 percent.

Simply changing the algorithms and showing more posts from friends and fewer from advertisers isn’t enough to curate the image of a kinder, gentler, less money-centric Facebook, especially when what’s really going on is that fewer friends and family are posting things.

Facebook, like all social networks, suffers from the syndrome of more lookers than contributors, so losing both becomes a problem of massive proportions for Facebook since it means fewer eyeballs. Fewer eyeballs means fewer advertisers, and fewer advertisers means less revenue for Facebook.

Between the bullying, the videos of people being beheaded and murdered, fake news and now a breach of user information, Facebook is facing a backlash from consumers and advertisers.

Regulators may be circling the wagons around Facebook, but it’s not clear what that means, what the remedies might be (outside the EU and U.K.’s efforts around GDPR) or how breaking it up would have prevented its bad behavior — or would in the future. What will is consumers fleeing the platform — just like they did with Myspace.

Then, there’s search. Google’s share of core search in the U.S. is about 64 percent. Microsoft’s Bing is about 24 percent, with Oath (a.k.a. Yahoo) at about 12 percent. In terms of mobile search, Google has a 93 percent share.  Consumers could download and use Bing on their mobile phones — Bing is an app in iOS and Google Play — but they don’t. They don’t because Bing search isn’t what consumers want to use.

If it was, more people would use it.

Crying foul over Google’s dominance in the EU, as Bing-funded opposition groups have done over the years, ignores the fact that consumers have a choice when it comes to search engines — and by and large they don’t choose Bing.

I’ll betcha my new, fancy, sparkly Italian shoes that the regulators in the EU don’t use Bing either.

As we’ve seen in the EU, after the huge $3 billion fine that was levied on Google, on top of being forced to change how its Shopping results are returned, merchants still aren’t satisfied and want the remedies revisited.

Why?

Because making Google pay a fine and change its business practices did nothing to make consumers want to use vertical search sites any more than they did before – just like they don’t want to use Bing.

Department stores used to dominate retail, and shopping was always done in a physical store. The internet was something in the early 2000s that most retailers dismissed as never amounting to much, so they ignored it.

And completely missed the impact to the consumer shopping experience that mobile phones and apps would have and the hit it would make to their businesses.

Today, despite the story the U.S. Census Bureau likes to tell — that 92 percent of all sales still happen in a physical store — the largest retailers have lost hundreds of billions in market cap in a few short years. In a sea of product sameness, consumers value convenience over going to the store. Buying from Amazon to have it delivered two days later is easier and comes with less risk than a trip to the store to buy something that’s out of stock.

Is that Amazon’s fault?

Or retailers’ — who ignored the impact of the Amazon Effect on consumer expectations and were forced to play defense, not offense?

At the same time, Apple and Amazon don’t rule all that they touch, either.

Consumers still like Netflix more than Amazon Prime. And Spotify more than Apple Music. And streaming generally a lot more than iTunes downloads.

When consumers see something they like, they use it, and they use it a lot. And when they don’t, they don’t — regardless of whether the business is the biggest of the big or the smallest of the small.

Just think, before Spotify was an IPO contender, it was just a tiny streaming app company in Sweden that turned out to decimate one of Apple’s crowning achievements — its music download business — despite its being a nearly trillion-dollar company.

The Middle Class Wage Squeeze Isn’t New

Ten years ago, the topic of income inequality was placed at the feet of Wall Street — the 1 percenters who all worked for the big banks that were too big to fail.

Ten years before that, Microsoft was the source of everyone’s problem in tech.

Today, it’s the Big Four that are being called out for robbing the middle class of the jobs they need to put food on the table. Robotics and technology are taking jobs from people who need them the most, it’s said.

However, the issue of middle class wage inequality has a history that’s longer than “the four” have been around — about three decades, most economists say.

I wrote a piece about the fascinating research done by economists who looked at consumer incomes over a series of generations. They examined anonymized tax data starting in the 1940s until 2015.

What they discovered was sobering: 56.5 percent of today’s millennials will never make more than their parents. With a median income of about $56,000 in the U.S. today, the financial future of the largest generational cohort since the baby boomers is clearly in question, and that’s a problem bigger than any or all of the Big Four put together.

There are many explanations for this.

Over the last three decades, our economy has moved from a manufacturing economy to a services economy.  Since the 1950s, we’ve seen the services economy grow from 24 percent to 50 percent of GDP — with financial services, healthcare, consulting and insurance the big growth drivers — and manufacturing shrinking from 33 percent to 12 percent — driven largely by the demise of the agriculture economy in the U.S.

Advances in technology have made it possible for goods and services to be produced more efficiently, delivering better outcomes for businesses and consumers. Access to data and the ability to mine, analyze and apply it has only expanded those possibilities for both businesses and consumers — and impacted how nearly all businesses operate.

Accommodating that shift and seizing these new opportunities requires a different workforce.

If it’s true that someone’s lifetime wage potential is more or less determined by the time someone reaches the age of 25, 10 years from now, the crisis will have only escalated.

Someone aged 45 in 2007, who was 25 two decades before the financial crisis, probably thought their future earning potential was pretty solid — until they lost their job and tried to replace it at the same level in a world defined by technology and a new set of skills.

Millennials who largely came of age during that same financial crisis had trouble getting good jobs — or any job — and got a late start to their earnings potential. Those with good educations and the right skills have the potential to catch up over time. Those that don’t, probably won’t.

But neither is the result of “the four” reducing the potential for job creation — or fixing it if there were eight or 10 and not four of them.

The failure of our educational system to prepare young people for the rhythm of this new economy bears a huge brunt of that blame. Positioning 25-year-olds for success means preparing them over the course of the 18 or 21 years they’re in school, recognizing that not everyone needs to go to college to build a great financial future for themselves. Self-driving cars will need repairs. Robots in fulfillment centers will need to be run by people. Construction workers will need to build the houses, roads and transportation hubs of the future.

If anything, the four, and platforms like them, can be the catalysts to unlocking those new opportunities and stimulating public-private partnerships to improve the quality of what our kids learn in school.

The Big Four All Compete with Each Other

This, I guess, is the most important point of all — and one that’s lost on everyone, including the regulators, everywhere in the world.

Facebook, Amazon, Google and Apple are competitors — vigorous competitors — not four companies operating independent of each other in discrete silos.

Amazon competes with Google for search in commerce — and vice versa — and now with Google and Facebook for advertising dollars. Apple and Google compete head to head for share in the smartphone market — and for commerce with their respective “Pays” even more broadly than that. Facebook would like to be a commerce platform and has invested in programs to position it that way, including enabling commerce via Messenger, Facebook and Instagram. All of them compete with each other in some way via peer-to-peer payments. Google today just launched Shopping Actions with Target and other retailers to close the loop when shoppers ask “Where can I buy this” as part of their search. That’s more than a casual shot across the bow at Amazon.

Voice has introduced an even more interesting dimension to this competitive dynamic. Alexa and Google are positioning themselves as intermediaries through which consumers find and buy products, do their banking, pay their bills, order an Uber and make a dinner reservation. Apple struggles to find its footing here, even though it was a voice pioneer with Siri. Facebook, if the rumors are true, is said to be building its own voice-activated speaker.

People like to compare the power of the big four with Ma Bell before the breakup. Before telecoms were deregulated, there was only one way to get phone service — Ma Bell. Now, landlines are a dying breed, and people spend most of their time on smartphones using apps and browsing the web — not making phone calls from a landline in the living room. In 2004 in the U.S., 92.7 percent of the population had a landline phone; today, only 45 percent of Americans do.

Breaking up companies, like the government did with Ma Bell, is to prevent consumer harm. That’s a tough claim to make when consumers have many choices today including Facebook, Amazon, Apple and Google and others that compete with them, too. And they move freely between and among them. Competition, it turns out, is the best oxygen there is for pruning the forest to let new growth sprout because it lets consumers decide who gets pruned and who gets to grow.

When consumers don’t like what a company is doing — for whatever reason — they take their business somewhere else. Today, they now have lots of choices and channels available to to find those new options.

Like any business, Facebook, Apple, Amazon and Google are using whatever tools they have at their disposal, including the customer assets that they’ve created over the last ten or twenty years, to find and keep the same customers. As platforms, they all leverage the power of a business model to make decisions about what services or products to subsidize to eliminate the friction of getting suppliers and buyers on board. That’s not a reason to break them up either, but the reality of how these platforms – and every platform like them – work.

To win their business, and to keep it, companies have to listen, watch and respond.

Regulators and everyone else who thinks breaking up the Big Four — and the next four who happen to come along behind them and get big — is the best way to let a thousand new flowers bloom might be advised to listen and watch what consumers do, too.