The State of Technology at the End of 2018

This article is a bit of an annual tradition: in mid-December I summarize the state of technology,1 and appropriately enough, this year’s edition coincides with a tech executive testifying in front of Congress. This time the executive was Sundar Pichai, the CEO of Google, and on the surface, it was more of the same; Casey Newton wrote:

From time to time the entire technology press corps gets together on Twitter, spends several hours live-tweeting the same event, and then writes a series of blog posts about how nothing important happened. This event is known as a Congressional hearing, and today we witnessed our final one of the year.

Newton’s pithy summary, though, missed one essential part of the script: the Twitterati complaining about just how stupid members of Congress are:

It’s hard to deny Ohanian the point: Congressman Lamar Smith’s line of questioning was — and I swear this is exactly what I wrote in my notes as I watched the hearing — “freaking delusional”.2

Smith Versus Pichai

Congressman Smith, like many of his Republican colleagues, was concerned about Google being biased against Conservatives;3 Congressman Smith stated:

Google has revolutionized the world, though not entirely in the way I expected. Americans deserve the facts objectively reported. The muting of conservative voices by Internet platforms has intensified, especially during the Presidency of Donald Trump. More than 90% of all Internet searches take place on Google or YouTube and they are curating what we see. Google has long faced criticism for manipulating search results to censor Conservatives. Organizations have had pro-Trump content tagged as hate speech or had content reduced in search results. Enforcement of immigration laws has been tagged as hate speech as well. Such actions pose a grave threat to our democratic form of government. PJ Media found 96% of search results for Trump were from liberal media outlets. In fact, not a single right-leaning site appeared on the first page of results. This doesn’t happen by accident, but is baked into the algorithm. Google’s algorithms…It will require a herculean effort in senior management to change the political bias now programmed into the company’s culture.

Pichai, as he did throughout the hearing, explained that Google did not manipulate search results for partisan ends, and that it would it not be in their business interest to do so.

This is, to be clear, correct: Google’s business is perhaps the most perfect example of a capital-intensive tech company there has ever been. The company spends huge amounts of money on research-and-development and back-end infrastructure for the sake of offering services and advertisements that have zero marginal costs. It follows, then, that the company is heavily incentivized to serve as many users as possible; being purposely biased against approximately 50% of them would be illogical.

Congressman Smith, though, was not convinced, leading to the exchange Ohanian highlighted:

Congressman Smith: To my knowledge, you have never sanctioned any employee for any type of manipulating the search results whatsoever. Is that the case?

Pichai: It’s not possible for an individual employee to manipulate the search results. We have a robust framework including many steps in the process.

Congressman Smith: I disagree. I think they can manipulate the process.

I mean, what are you supposed to say to that? Any person that works at Google — indeed, any person that has worked in any technology company of even the slightest scale — knows that it would be impossible for a rogue employee to manipulate search results. Good luck, though, convincing Congressman Smith.

Google’s Impregnability

Still, as a thought experiment, suppose Congressman Smith were right, and that Google’s search results, whether via managerial decree, general employee bias, or rogue employee, were gamed to disfavor Conservatives. The solution seems clear: create a competitor to serve the part of the market that is dissatisfied with Google. After all, this is a company that made $110 billion in revenue and $27 billion in pre-tax income;4 big profits mean a big opportunity for competitors, right? So what is Congressman Smith complaining about?

The issue, of course, is that Google is, at least for a while (and more on this in a bit), impregnable: the company is an Aggregator with positive feedback loops everywhere:

  • A superior search product earns users, leading to more data and more supply that leads to better results, earning more users.
  • Superior ad inventory that attracts advertisers, leading to more data that, when combined with aggregated users, leads to more inventory that is (justifiably) more expensive than alternatives, resulting in outsized revenue and profits.
  • Outsized revenue and profits make it possible to acquire complementary companies (like DoubleClick), new sources of growth (like YouTube), and invest massively in research and development (for products like Android and TensorFlow), all of which serve to accelerate the first two feedback loops.

The result is that consumers — whatever their political affiliation or feelings about bias — use Google because it is the best option, and, for all of Google’s technical brilliance, its insurmountable “bestness” is, at this point in the company’s history, more due to the frictionless structure of the Internet, with its zero distribution and transaction costs that make it possible for a company to achieve Google’s insurmountable scale, than it is due to any sort of unique innovation.

The Cost of Dominance

But still, so what? Google offers tremendously valuable services for no direct cost to consumers. What’s the problem? It is certainly hard for the American antitrust community to find any, thanks to the consumer welfare standard: Google is not raising prices for consumers, they are lowering them, in basically every market they enter.

The question that must be asked, though, is at what cost? This year’s set of Congressional hearings suggest that one casualty is any sort of effective government oversight: a lack of competition for not just Google but also Facebook, particularly in terms of digital advertising, combined with an antitrust philosophy stripped of even a shred of suspicion about sheer size and the political and economic power that inevitably follow, means politicians are left with little recourse other than vague references to regulations that will only entrench the two consumer tech giants at best, and Smith-style conspiracy theories at worst (and, I’d note, it is not as if Progressives are thrilled about Google and Facebook’s content moderation policies and algorithms either).

Equally concerning is the innovation that is not happening: venture investment in seed rounds and initial follow-ons is down considerably, and numerous studies (like here, here, and here) show that most of the decline is in the consumer space — i.e. the domain of Google, Facebook, Amazon, and Apple (I wrote about Apple’s problematic App Store two weeks ago).

Moreover, the VC-backed tech industry knows better than anyone that this is not because large companies, with their top-down decision-making, are inherently better at innovation. The goal of venture capital is to make multiple bets on ideas with extremely uncertain outcomes, because the best way to figure out what works is to let the market decide, not mid-level managers. That strategy, though, isn’t nearly as successful if the market isn’t functioning correctly.

In contrast, consider the enterprise software market: here the Internet has very much lived up to its billing, unleashing a torrent of innovative companies made possible by cloud computing, that are challenging lumbering incumbents up-and-down their product lines. And, to their credit, some of those incumbents, like Microsoft, are responding in kind, dramatically overhauling their core strategies and releasing new products and services that are innovative in their own right. Small wonder both venture capital investment and the IPO market are dominated by these enterprise startups: functioning markets have positive feedback loops of their own.

The State of Technology

This, then, is the state of technology in 2018: the enterprise market is thriving, and the consumer market is stagnant, dominated by the “innovations” that a few large behemoths deign to develop for consumers (probably by ripping off a smaller company). Meanwhile a backlash is brewing on both sides of the political spectrum, but with no immediately viable outlet through competition or antitrust action, the politics surrounding technology simply becomes ever more rancid.

Still, some might argue, this moment may soon pass: just look at Microsoft. I praised them above for their new-found competitiveness, driven by the fundamental shift wrought by the combination of cloud computing and mobile that obviated their PC monopoly-based business model. Surely Google’s dominance will soon pass, just like Microsoft’s did, right?

I’m not so sure.

The Internet Age

The single most important factor in the loosening of Microsoft’s monopoly was the Internet. Suddenly applications could be run and data could be stored in a way that was independent of the underlying operating system, undoing Microsoft’s platform lock-in.

How the Internet undid Microsoft's platform advantage

This didn’t affect Microsoft immediately — people were already accustomed to buying PCs (although it is not solely because of Steve Jobs’ return that the Mac’s fortunes increased in line with Internet penetration) — but it created an ecosystem that made a device like the iPhone, with its groundbreaking browsing capabilities, immediately useful in a way it wouldn’t have been otherwise. That attracted consumers, which attracted developers to the App Store, and the rest is history.

That story extended to enterprise: not only were more and more line-of-business applications delivered via the cloud, but new companies providing services that competed with Microsoft were far quicker to support mobile, providing a compelling reason to switch, unwrapping Microsoft’s bundle and opening the door to new companies of all types.

Again, though, all of this was because of the Internet, a paradigm shift that I have repeatedly likened to the Industrial Revolution in the profound impact I expect it to have when all is said-and-done. How often, though, do such paradigm shifts actually happen? Yes, the Internet saved the industry from Microsoft, but are we so sure another Internet-level shift, one that will upend Google’s dominance, is on the horizon?5 And how much foregone innovation and political dysfunction are we willing to suffer in the meantime?

I wrote a follow-up to this article in this Daily Update.

  1. Here is 2014, 2015, and 2016; I skipped it last year in order to cover Disney’s acquisition of 21st Century Fox  

  2. OK, fine, I might have used a slightly different adjective 

  3. The capitalization is intentional, in reference to the distinct American political movement 

  4. Google took a special charge related to the recent tax law last year, artificially lowering its net income to $12.6 billion 

  5. Yes, the blockchain is fundamentally interesting, particularly its decentralized nature, along with the idea of digital scarcity; I suspect, though, that when and if blockchain applications achieve meaningful use cases they will be in areas fundamentally different than Google and Facebook, which are predicated on attractive user experiences