Is Big Tech Strangling Startups?

In a word, yes. But what is anyone going to do about it? JL

Farhad Manjoo reports in the New York Times:

Where 10 or 20 years ago we looked to start-ups as a font of future wonders, today the momentum has shifted to the big guys. In addition to the platforms they own, the Five own artificial intelligence, voice assistants, virtual and augmented reality, robotics, home automation, and every thing that will rule tomorrow. Start-ups are still getting funding but fewer than 1% end up as $1 billion companies. Their chances of breakout success — and especially of knocking the giants off their perches — have diminished considerably.

The tech giants are too big. But so what? Hasn’t that always been the case?

As the men who run Silicon Valley will be the first to tell you, a company’s size doesn’t matter here. For every lumbering Goliath, there are always one or two smarter, faster Davids just now starting up in some fabled garage, getting ready to slay the giants when they least expect it.

So if you’re worried about the power of the Frightful Five — Amazon, Apple, Google, Facebook and Microsoft — just look at how IBM, Hewlett-Packard or monopoly-era Microsoft fell to earth. They were all victims of “creative destruction,” of an “innovator’s dilemma,” the theories that bolster Silicon Valley’s vision of itself as a roiling sea of pathbreaking upstarts, where the very thing that made you big also makes you vulnerable.

Well, maybe not this time.

The technology industry is now a playground for giants. Where 10 or 20 years ago we looked to start-ups as a font of future wonders, today the energy and momentum have shifted almost completely to the big guys. In addition to the many platforms they own already, one or more of the Five are on their way to owning artificial intelligence, voice assistants, virtual and augmented reality, robotics, home automation, and every other cool and crazy thing that will rule tomorrow.

Start-ups are still getting funding and still making breakthroughs. But their victory has never been likely (fewer than 1 percent of start-ups end up as $1 billion companies), and recently their chances of breakout success — and especially of knocking the giants off their perches — have diminished considerably.

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The best start-ups keep being scooped up by the big guys (see Instagram and WhatsApp, owned by Facebook). Those that escape face merciless, sometimes unfair competition (their innovations copied, their projects litigated against). And even when the start-ups succeed, the Five still win.

Because today’s giants are nimbler and more paranoid about upstart competition than the tech behemoths of yore, they have cleverly created an ecosystem that enriches themselves even when they don’t think of the best ideas first. The Five run server clouds, app stores, ad networks and venture firms, altars to which the smaller guys must pay a sizable tax just for existing. For the Five, the start-up economy has turned into a heads-I-win-tails-you-lose proposition — they love start-ups, but in the same way that orcas love baby seals.

There is perhaps no better example of this dynamic than what has happened to Snap, the company that makes the disappearing messaging app Snapchat. Although it is one of the most innovative consumer-focused internet companies — Snap created a whole new paradigm in social networking, and pioneered the idea that the camera is the future of human communication — it has been battered by the giants.

After failing to buy Snap several years ago, Facebook repeatedly tried to copy its key innovations. This year, when Facebook lifted Snapchat’s Stories feature for Instagram, WhatsApp and Facebook’s main app, it seemed to deliver a death blow. But Facebook isn’t the only behemoth trying to feed off Snap’s carcass. In January, Snap signed a cloud hosting deal with Google. It agreed to pay Google $400 million a year for the next five years. Note that Snap booked only about $330 million in ad revenue in the first half of this year. In other words, it’s paying more than half of its revenue to Google.

Oh, and do you know who its largest competitors in the internet ad market are? Surprise! Facebook and Google.

The small guys won’t concede any this, of course.

Unbridled optimism fuels start-up world, and many investors and start-up executives I talked to in recent weeks argued that with the insane amounts of money pouring into start-ups, the Five don’t have the whole game won.

They said the Five’s platforms had made starting companies cheaper and easier, and pointed to several successful start-ups that managed to elude the Five’s clutches in the last few years: Netflix, Uber and Airbnb. And when you look at business-focused companies that aren’t household names, you come up with dozens more, from Slack to Stripe to Square.

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“In a lot of ways I’d say it hasn’t changed,” said Joey Levin, the chief executive of IAC, an internet and media company based in New York. “I’ve been around the internet long enough, and the first thing we used to ask in every meeting when I started was, ‘Why won’t Microsoft do your business?’ Then six years later it was, ‘Why doesn’t Google do it?’ Now it’s a combination of why can’t Facebook, Google, Apple or Amazon do this?”

Mr. Levin’s position is interesting. Even if you may not have heard of it, IAC has been battling giants online for a long time. The company grew out of the media tycoon Barry Diller’s television holdings of the 1990s; over the last two decades, IAC created a string of digital brands that tried to find some foothold outside the fiefs of the giants. Among them are Expedia, Match.com, Tinder, Ask.com and Vimeo.

Some of these companies became the biggest brands in their categories, while others were also-rans that came up short against the day’s tech giants. In many cases, though, IAC made money by shrewdly navigating the giants. Sometimes it worked with the behemoths, other times it competed with them, and always it looked for opportunities above and beneath and between the giants, like a clever pigeon picking up crumbs around a picnic table.

IAC’s latest gambit is Angi Homeservices, a company that combines two big brands aimed at home repair and refurbishing, Angie’s List and HomeAdvisor. That company competes directly with some of the Five — both Google and Amazon have services meant to help you find people to install things your house.

Chris Terrill, the chief executive, told me that Angi Homeservices had a dedicated team working on providing a service that’s superior to anything the giants can build. But he also said his company was eager to team up with one of the big guys — for instance, on one of their voice-assistant platforms — because working with one of the Five could ease its path into the big leagues.

“We think that a smart voice provider will say, ‘If I want to win at all costs, we’ll go get the very best partner’ — and that’s us,” Mr. Terrill said.

In some ways, IAC could be a model for the internet company of tomorrow. It clearly aims big and isn’t going for second place. But it has also internalized a kind of working method that recognizes the Five as more-or-less permanent fixtures of the internet. It’s not betting on their demise; rather, it’s betting on their continued success. If Angi is to win, so will one or more of the Five.

IAC’s executives recognize the danger of a digital marketplace that is so heavily dependent on big guys. “I think the opportunities are still there, but I do worry that some of the biggest players are going to stifle that competition by trying to do and own too much themselves,” Mr. Terrill said.

I asked another IAC veteran, Dara Khosrowshahi — who until recently was the chief executive of Expedia — whether he believed the internet was still an open field for innovation, or whether the Five were closing it off.

“I’m mixed as it relates to that,” he said. “I fundamentally think innovative ideas can still survive and thrive, but the Googles and Facebooks of the world have so much more intelligence as to mass consumer behavior that they probably have an unfair advantage in identifying these early fast movers — and are willing to pay prices that are extraordinary for them.”

In August, Mr. Khosrowshahi was appointed chief executive of Uber, where he will have to deal with the giants more directly. Though his company is the most highly valued start-up of our age, its success seems far from assured. Many of its problems are of its own making, and Mr. Khosrowshahi is determined to fix them.

But like Snap, Uber is at the mercy of the Five. Alphabet, Google’s parent company, is an investor in Uber. But Alphabet’s autonomous-car company, Waymo, is also a competitor to Uber. On top of that, Waymo has sued Uber, alleging theft of trade secrets.

The future of Uber, of ride-hailing and of autonomous vehicles in America is hazy. But here’s one thing that seems a sure bet: Whether Uber wins or loses, Google will end up doing just fine.