Aggregation and the New Regulation

This article isn’t about the New York Times’ exposé on Amazon’s workplace (I covered that on Monday). Nor is it about the polarized reaction to that exposé (I covered that on Tuesday). Rather, it’s about the fact I’m writing about it for the third day in a row.1

Whatever your feelings about the New York Times’ article, there’s no question it’s a blockbuster. It has dominated Twitter for going on five days, and is the most commented story in New York Times history. Just as in days gone by nearly every other news organization in the country, including TV, spent the early part of this week following up on the story, and perhaps most consequentially, Amazon founder and CEO Jeff Bezos felt compelled to respond via a company-wide email. It’s obvious why: not only did the story have the potential to damage Amazon’s ability to recruit talent, the way in which the story resonated broadly threatened the willingness of people to visit Amazon at all.

This was almost the exact opposite of what happened in New York City a few weeks previously. Mayor Bill de Blasio had over the course of several months been setting the stage to cap the growth of for-hire car companies so that the city could study the effect on Manhattan’s traffic; critics, including Uber — the company most hurt by the proposal — argued that in actuality the mayor was paying back taxi companies for their support of his campaign. Just days before the cap was set to be implemented, de Blasio and his aides were confident; BuzzFeed reported:

City Hall doesn’t buy the notion that Uber is growing fast enough for a cap to disrupt the service…And the mayor’s circle also doesn’t believe that Uber is broadly popular, or represents anything most New Yorkers care about.

“It’s a boutique side issue,” said a top City Hall ally. “There’s a small set of excited tech people who are reading Mashable and might think the mayor isn’t innovative enough.”

Three days after that quote was published, de Blasio backed down, withdrawing the proposal in the face of crumbling poll numbers and rival politicians taking advantage of the reality that there were a huge number of New Yorkers that cared greatly about having access to their favorite car-sharing service. It turned out that politics as usual — get some money, make some promises, get elected, and then make good on those donations — didn’t really apply, at least for this issue: Uber had aggregated public opinion in its favor.

I wrote last month about Aggregation Theory, and both Amazon and Uber are examples of the theory in action: Amazon doesn’t make the stuff they sell (mostly), but they sell everything to a huge number of customers in the market with whom they have an ongoing relationship. Uber is even more distinct: the company doesn’t own the cars that provide its service but instead owns the customer relationship. Both are enabled by the Internet’s radical lowering of transaction costs and the possibilities for scale that result.

The point of leverage for these Internet companies is those consumer relationships: Amazon attracts a wide range of suppliers and merchants eager to sell to their customer base, and the company is not shy about leveraging said customer base to extract value from its suppliers. Similarly, Uber continually squeezes drivers with lower prices and higher fees, even as it remains the top choice for drivers because of its rider liquidity.

This last point is key: under Aggregation Theory the winning aggregators have strong winner-take-all characteristics. In other words, they tend towards monopolies. Google is perhaps the best Aggregation Theory example of all — the company modularized individual pages from the publications that housed them even as it became the gateway to said pages for the vast majority of people2 — and so, given their success, perhaps it shouldn’t be a surprise that the company is under formal investigation by the European Union.3

Still, as this excellent feature in Bloomberg Businessweek explains, in some respects what has happened has been a shock:

[In February 2014 European Commissioner for Economic and Financial Affairs Joaquín] Almunia stood at the podium in an auditorium on the ground floor of the Berlaymont, the 50-year-old institutional headquarters of the European Commission, and announced [a deal with Google]. Google’s long-running antitrust ordeal in Europe, it seemed, was finally over…

On April 15, 2015, Almunia’s successor, Margrethe Vestager, a 47-year-old former finance minister from Denmark, approached the same Berlaymont podium in the same auditorium. “Dominant companies can’t abuse their dominant position to create advantage in related markets,” she said bluntly, formally accusing Google of exploiting its supremacy in general search to dominate the market for online product searches — the equivalent of an indictment, the very move that Almunia had sought to avoid through the private settlement at Davos…

In the span of just 15 months, Google somehow lost Europe.

It turns out that there was one event that stood out in that 15 months; one event that may very well end up costing Google up to $6 billion and a dangerous loss of focus: a newspaper column. From the Bloomberg Businessweek article:

In April 2014, Mathias Döpfner, CEO of Axel Springer, wrote an open letter to Schmidt for the Frankfurter Allgemeine Zeitung titled: “Why We Fear Google”…When Google favors its own services, he [wrote], “It is not even clearly pointed out to the user that these search results are the result of self-advertising. … This is called the abuse of a market-dominating position.” Of the proposed settlement with Almunia, he says: “This is not a compromise,” because of the requirement that Google’s rivals bid in an auction for placement in the new search box. “This is the introduction, sanctioned by an EU authority, of that kind of business practice which in less honorable circles is called extortion.”

Soon after the letter ran, Axel Springer and Lagardere Group, the French media syndicate and owner of the Hachette Livre publishing company, launched a trade organization called the Open Internet Project to oppose the Google deal. At the same time, Deutsche Telekom, the German phone company, filed its own antitrust complaint against Google, becoming one of the first large European companies to join the fight. The case against Google no longer seemed like a conspiracy led by Microsoft. European Big Business didn’t like the settlement either.

The trouble with accusing Google of abusing its position is that, as the company is fond of pointing out, “Competition is only a click away.” In other words, unlike monopolists of old, Google is not in any way locking you in to their platform. Nor, for that matter, are Amazon or Uber. Rather, each of them, along with the other Internet companies whose business models fit Aggregation Theory, compete on the basis of the user experience, because once they have the users the suppliers of whatever it is those users want will have no choice but to fall into line.

It follows, then, that to the degree that governments answer to the people, effective control and regulation of these companies will be even more difficult than regulating the monopolies of old: that’s why Google got its first deal, and it’s why Uber was able to stare down de Blasio. What changed in Google’s case, though, was the Axel Springer article and the widespread attention it received. Similarly, while Amazon is not being accused of antitrust (for now anyways), at least in some small way the company was this weekend forced to respond in a way they usually avoid because of an article. Meanwhile, Uber, seemingly in a worse position politically, emerged from its crisis stronger than ever, confident in its ability to wield the collective influence of its customers to accomplish its political ends.

In other words, the regulation situation for these massive winner-take-all companies is not hopeless, but it has changed: their strength derives from the customer relationships they own, which means quiet backroom deals and straight-up arm wrestling of the Google and Uber varieties are liable to backfire in the face of overwhelming public opinion; it is in shaping that public opinion that the real battle will be fought. And while it’s true that the direct relationship aggregation companies have with their users is an advantage in this fight, the overwhelming power of social media is the new counterweight: it is easier than ever to reach said users with a report or column that resonates deeply. Your average writer or reporter has more (potential) power, not less.

I do think, on balance, this shift is a positive one. While it’s true that absolute power leads to ruin, up until that point aggregation companies win by maximizing the user experience, a big positive for consumers. Moreover, unlike old supply or physical distribution-based monopolies, the Google argument — competition is only a click (or app download) away — largely holds: I think it unlikely most of these companies, having won by delivering more consumer surplus than anyone else, will have that much latitude to suddenly start keeping most of that surplus for themselves.4

There is certainly an argument that the seeming haphazard nature of what breaks through on social media and what doesn’t ought to be a concern, and it’s one I share, but perhaps for different reasons than most: I’m certainly worried about the truth being suppressed, or blatantly false stories making the rounds, but even more insidious is a seemingly objective story that mostly gets the facts right but the context wrong.

It’s arguable the New York Times’ Amazon piece fits here: not only are there legitimate arguments to be made that hard-driving and criticism-intensive workplaces drive progress in a very real way,5 it’s also true that Amazon’s white-collar employees have plenty of options; the treatment of the company’s factory workers is a far greater outrage in my opinion. That said, several of the anecdotes in the New York Times’ story are clearly awful and indefensible and the reason for Amazon’s quick response: should said anecdotes turn out to be true the story will have already done a great deal of good (and while the New York Times story didn’t draw attention to warehouse conditions, much of the follow-up has).

Still, I think the situation is better than a past that people remember as being far better than it actually was: local newspapers certainly used to expose scandals, and the financial freedom driven by a geographic advertising monopoly helped in that regard. Today, though, the day-to-day existence of customers is not only better with instant access to the world’s information, all the world’s books and retail goods, and transportation services anytime and anywhere, but there is also the fact that market forces driving said providers to compete first-and-foremost by the customer experience are far more effective in reducing bad behavior broadly than a local journalistic gumshoe could ever be.

On the flipside, the size and stature of these companies makes for a big target, and the New York Times just showed that an investment in pursuing that target is likely to pay off. That is ultimately a good incentive and an important counter-weight that is not only good for society broadly but, in the long run, good for the companies under investigation as well.

  1. So meta 

  2. Although the company has now been passed by Facebook when it comes to the amount of traffic driven to publishers 

  3. Or maybe it should, given the reality of the previous footnote 

  4. For example, to use two commonly made arguments that happen to be relevant to this article, I don’t think either Amazon or Uber will be able to one day simply jack up prices; their value, should they achieve it, will come from having superior cost structures that scale in the truest sense of the word — every additional customer lowers the cost/per/customer for the company as a whole — which by extension will result in radically larger volumes than today 

  5. Not just in tech but also all industries