Tech companies come in two flavors: those that are platforms and those that want to be platforms. A platform is one of those ideas that is easy to see yet hard to define, and therein lies the challenge for regulators. By the time regulators figure out that a given company is a platform and prone to tipping over into a predatory monopolist, it’s often too late to do anything meaningful to reign the company in. And by the time any remedies are implemented, the fast-moving world of tech innovation has already moved on, rendering those solutions almost meaningless.
One important concept to understand about true platforms is that they have no boundaries. All tech companies want their platform to be all things to all people. Consider Amazon’s desire to own all of ecommerce, which has only been intensified by the COVID-19 pandemic. This includes logistics, brick-and-mortar (or what’s left of it), enterprise/cloud computing, and content creation/distribution. Google/Alphabet has a similarly ambitious purview with its expansion from core search and targeted advertising into everything from consumer devices to Google Health, and a slew of other non-core initiatives.
In addition, tech companies that are still establishing their dominance or feel their core business may be threatened are willing to pay extraordinary premiums to acquire companies they deem a threat. Examples abound from the well-understood acquisitions of Instagram and WhatsApp by Facebook to the less obvious acquisition of YouTube by Google/Alphabet. In the case of YouTube, a major motivation was the preservation of Google’s leadership in all things search. The phenomenal growth of YouTube’s video corpus created a new pool of content that needed to be included in any search service, and it was unclear if Google would have unfettered access to index this valuable content. In all of these cases and many others, the boundary of what is within the platform was substantially extended with little concern, or even awareness, shown by regulators or the public in general.
Given the boundaryless nature of these hyper-platforms, it’s no wonder that tech giants find it almost impossible to be good partners. Everyone they partner with is at risk of becoming roadkill. The current behemoths — Apple, Amazon, Microsoft, Alphabet, and Facebook — are qualitatively different from the previous generation of tech monopolies such as IBM, Cisco, AT&T, and Intel. The difference is that those monopolies really did have well-defined boundaries and efforts to extend their platforms were half-hearted and typically failed. Take Cisco’s end-user initiatives, which included the acquisitions of Flip Video and WebEx. The former was written off within a year and the latter, while not a failure, is redundant in an increasingly crowded space.
In a sense, it was easier to regulate monopolies in the past simply because you could clearly see when they extended themselves into adjacent markets. Regulating something you can see and touch requires less of a leap of imagination than the new world made of bits. You can regulate the acquisition of one airline by another because you only need to look at the routes and hubs to see if competition and/or consumers will be hurt. But what about the acquisition of a corpus of user-generated videos, what or who exactly is being hurt or helped?
So, given the static/slow nature of regulation and the fast-evolving nature of tech, how then should businesses approach hyper-platforms?
For startups, the imperative is to stay far away. To that end, it’s critical to analyze the potential overlap in core technology and expertise, primary customers, channel, and talent. Founders owe it to themselves to drill into this overlap analysis and demonstrate the proverbial 10x benefit promised by the startup opportunity.
As a sobering example, it’s worth considering the notion of investing in the AWS (Amazon Web Services) ecosystem. For a startup, the benefit of building on top of AWS is clear — immediate scalability and an enormous, addressable customer base. And yet, AWS itself has demonstrated an insatiable appetite to ingest as much of the ecosystem around it as possible with its 165, and counting, distinct compute services. It’s not difficult to imagine that many of these services could have been standalone companies in a world with more robust pro-competition regulatory regimes. However, it would be almost irresponsible to invest in the AWS ecosystem given Amazon’s existential need to vacuum up as much of the value around its so-called “core” cloud infrastructure. Why so-called core? Because, as should be clear by now, the whole notion of core has no meaning other than as a misnomer for limitless or unbounded market ambition.
Possibly the most useful approach to avoiding a premature death at the hands of the hyper-platforms is to pursue opportunities that require deep domain expertise and address a distinct base of customers. Nevertheless, at some point, every new entrant that has meaningful scale will become a target for one or more of the hyper-platforms, as something to be either challenged or acquired. In either case, provided it has built a big enough competitive moat, it should be in a position to deliver an attractive return for its investors and entrepreneurs.
For established businesses, both public and private, hyper-platforms present a different challenge. In this situation, it’s the hyper-platforms that play the role of startups. Take the example of Alphabet’s Waymo autonomous driving division. What are we to make of an initiative that is “making it safe and easy for everyone to get around, without the need for anyone in the driver’s seat”? For the incumbent car companies and their ecosystem there is only one response: innovate. And many of them are doing just that with their “startup” autonomous driving initiatives.
The broader lesson is that all industries, whether they are inherently information based, such as financial services, or more firmly centered in the physical world, like agriculture and manufacturing, must wholeheartedly adopt the mindset of digital innovation in order to survive the inevitable attack from hyper-platforms.
Salman Ullah is managing director of Merus Capital, an early-stage VC firm based in Palo Alto.