Ariel Ezrachi - How Big-Tech Barons Smash Innovation—and How to Strike Back

A NY NAVIGATOR KNOWS A basic rule. A small degree error, insignificant in a short voyage, will increase the longer one travels. Its known as the one in sixty rule of thumb. A one-degree error in navigation will lead a pilot one mile away from her destination for every sixty miles of travel. Many airplane crashes, sailing accidents, and maritime mishaps have arisen from a seemingly insignificant drift off course.

What does the one in sixty rule have to do with innovation in the digital economy? In many ways, it helps illustrate how seemingly insignificant flaws in past assumptions and policies have led us off course. It helps us appreciate the impact and actual costs of past economic and industrial policies that failed to adapt to the changing dynamics of competition and innovation in the digital age.

A slow-moving tanker ship has ample opportunities to correct the navigation error. But as speed increases, it is harder to fix quickly. Suppose you are on the X-43 jet traveling at 6,598 miles per hour, and you are off course by just 1 degree. In that case, you will stray over one hundred miles away from your destination in the first hour alone... and in the digital economy, we are traveling at supersonic speed, with more significant degrees of error.

In late 2017, the European Commission asked us to research innovation in the digital economy. Our earlier work, including Virtual Competition, raised the concern of policymakers around the world as we uncovered several significant risks of the digital economy that affect price, quality, and consumer well-being. But on innovation, we, like many others, were optimistic. At first, we didnt think we were off course. But, as we dug into the data over the next few years, we found multiple fallacies about innovation in the digital economy. Our counterintuitive findings were unsettling.

After submitting our report to European policymakers, we wondered if our report was collecting dust on some desk. But we began getting calls from other policymakers who had seen our report, and they too had similar concerns. That led to more unsettling truths.

We intuitively know something is amiss. Lots of us, as surveys reveal, are concerned about corporate power in many markets, including in the digital economy. But, seemingly, people still believe, as we initially did, that innovation has been unaffected. It remains synonymous with the online economy. Indeed, as the COVID-19 pandemic showed, we can do more online, from social interactions to work, from shopping to learning. But as we increasingly go online to socialize or shop, we instinctively understand that many of these innovations have a dark sidewhether to our privacy, well-being, or autonomy. The heady tech utopia of the 1990s now seems a dystopia, where many devices, apps, and services come from digital ecosystems controlled by a few powerful firms (whom we call the Tech Barons). Think, for example, of Alphabet (Google), Apple, Meta (Facebook), Amazon, and Microsoft (GAFAM for short).

These Tech Barons not only govern the competition within their tightly controlled ecosystems, but they also determine the nature of innovation that makes it to the market. And to protect their interest, they make sure to only advance and allow innovation that does not disrupt their business models and profits.

This puts companies, consumers, and innovators in a tough spot.

Why?

Because the digital economy is central in our modern world. We now spend a lot more time online, and for many companies, that means if they dont have a significant online presence, they might as well not exist. Competing means more than being online. It means having a compelling presence, scale, customer base, and innovative products. It means companies re-engineering themselves into AI-centric firms, where the underlying data pipeline helps train and improve the algorithms, which drive many of the companies critical functionseverything from setting prices to personalizing services to predicting behavior.

The shift to digital seemingly offers new opportunities. We have already seen how popular platforms, like Airbnb, Uber, and Lyft, have disrupted the hotel and taxi industries. Amazon already disrupted retail, and, along with Netflix, Apple, and Google, is disrupting the cable and entertainment industries. With the metaverse on the horizon, where well access the internet through virtual reality, no company can afford to sit on the sidelines.

It is not only market dynamics that are rapidly changing, but also the expectations for growth. In 2019, General Motors sold globally around 7.7 million carsan impressive twenty times as many cars as Tesla sold in that year (about 370,000 vehicles). And while Ford sold more than six times as many cars, Tesla by early 2020 was worth more than Ford and GM combined. And Tesla is staking its future on smart, self-driving cars.

Given the nature of the digital economy, with network effects and economies of scale, the nimble and adaptive first movers will thrive, while the laggards will rarely catch up. (Consider Microsoft, which had the technology for smartphones years before Apple, but was too late in introducing its Windows phone.)

So, the prevailing message is that companies need to quickly identify and exploit opportunities in the digital economy. Being a fast follower wont cut it. If a company isnt among the initial rivals in these winner-take-all online markets, it will quickly be displaced by those who are.

Innovation and creativity, we are told, are the key to success. And the underlying assumption is that the digital economy is open terrain for any disruptor willing to experiment and quickly learn from its customers behavior. If you are good at what you do, you will make it! The digital economy appears contestable, with millions of advertisers, apps, merchants, and websites competing for revenue and our attention.

OK, we hear you say, but where is the catch?

While these assumptions might have been valid in the 1990s, that is not the case today. A few Tech Baronsmost notably, GAFAMare now the critical gatekeepers in most of the world, and the contestability in their ecosystems is carefully orchestrated. Most importantly, the viability of new products and services within their ecosystems relies on data and interoperability, often controlled by them. As the digital economy expands to new industries and the metaverse, so will the Tech Barons power.

Based on our research and discussions with market participants, four things become clear: first, the Tech Barons design their ecosystems to favor their own interests (at the cost of crushing beneficial innovations); second, the Tech Barons value chain dictates the type and scope of innovation that you will find, and in looking at the value chains, we can predict that innovations will become scarier (envision virtual reality headsets that can decode your emotions and private thoughts); third, even if you can avoid some or all of the Tech Barons ecosystems, you cannot avoid the toxicity of some of their innovations; and finally, while the Tech Barons are in the news for their mounting antitrust attacks, the likely relief, if any, will not fix the underlying problems.

As we continue along the current path, we will soon feel the full magnitude of the one in sixty rule, as valuable innovations are stifled and toxic innovations (which primarily extract or destroy value) flourish. The digital platforms are often analogized to a coral reef, where various app developers and technologies ultimately contribute to the platforms structural complexities. Instead, well see putrid red algae that attack these coral reefswhere the Tech Barons kill off healthy innovators by depriving them of the oxygen needed to survive.