Antitrust Politics

The only thing more predictable than members of Congress using hearings to make statements instead of ask questions, and when they do ask questions, usually of the “gotcha” variety, refusing to allow witnesses to answer (even as those witnesses seek to run out the clock), is people watching said hearings and griping about how worthless the whole exercise is.

There was, needless to say, all of the above last Wednesday, when the House Subcommittee on Antitrust, Commercial, and Administrative Law held a hearing featuring Tim Cook, CEO of Apple, Jeff Bezos, CEO of Amazon, Sundar Pichai, CEO of Google, and Mark Zuckerberg, CEO of Facebook. Statements were made, gotcha questions were asked, answers were interrupted, clocks were run out, and there was a whole lot of griping about what a waste of time it all was.

To be sure, it does seem like there must be a better way to hold these hearings, particularly if the goal is to learn something new, but the reality is that genuine inquiry is much more likely to happen without the glare of the media spotlight that inevitably accompanies such a high profile hearing; what that glare will highlight is the politics of the topic in question: what do various politicians and parties actually care about, what do they think that their constituents care about, and how should those affected by said hearings respond.

In that regard last Wednesday’s hearing was a success: partisan priorities were made clear on the politician side, tech’s collective position and impact on society came into view, even as each of the companies at the hearing revealed different strengths and vulnerabilities. This article will examine all of these points, but first a caveat: this post, even more than most on Stratechery, is meant as an analysis of the politics of this hearing in particular, not a statement of values; unless I say so explicitly, I am not necessarily endorsing or condemning any particular line of argument, simply pointing it out.

The Political Effects of Monopoly

Lina Khan, who rose to prominence with her 2017 law review article Amazon’s Antitrust Paradox, and who served as counsel for the antitrust subcommittee over the course of the investigation that culminated in Wednesday’s hearings, summarized the New Brandeis Movement of antitrust in 2018:

As the name suggests, this new movement traces its intellectual roots to Justice Louis Brandeis, who served on the Supreme Court between 1916 and 1939. Brandeis was a strong proponent of America’s Madisonian traditions—which aim at a democratic distribution of power and opportunity in the political economy. Early in the twentieth century, Brandeis successfully updated America’s antimonopoly regime, along Madisonian lines, for the industrial era, and his philosophy held sway well into the 1970s. As the ‘New Brandeis School’ gains prominence — even prompting two floor speeches by Senator Orrin Hatch (a Republican from Utah) — it’s worth understanding what this vision of antimonopoly does and does not represent.

While the article is worth reading in full, it is no accident that Khan started with “democracy”:

Brandeis and many of his contemporaries feared that concentration of economic power aids the concentration of political power, and that such private power can itself undermine and overwhelm public government. Dominant corporations wield outsized influence over political processes and outcomes, be it through lobbying, financing elections, staffing government, funding research, or establishing systemic importance that they can leverage. They use these strategies to win favorable policies, further entrenching their dominance.

Brandeis also believed that the structure of our markets and of our economy can determine how much real liberty individuals experiences in their daily lives. Most people’s day-to-day experience of power comes not from interacting with public officials, but through relationships in their economic lives — negotiating pay with an employer, for example, or wrangling the terms of business with a trading partner. Brandeis feared that autocratic structures in the commercial sphere — such as when one or a few private corporations call all the shots — can preclude the experience of liberty, threatening democracy in our civic sphere.

Chairman David Cicilline, in the conclusion to his opening statement, made a clear gesture to the New Brandeis Movement:1

Because concentrated economic power also leads to concentrated political power, this investigation also goes to the heart of whether we as a people govern ourselves, or whether we let ourselves be governed by private monopolies. American democracy has always been at war against monopoly power. Throughout our history, we’ve recognized that concentrated markets and concentrated political control are incompatible with democratic ideals. When the American people confronted monopolies in the past, be it the railroads or the oil tycoons or AT&T and Microsoft, we took action to ensure no private corporation controls our economy or our democracy.

What was notable to me is that in the hearing Cicilline and the other Democrats never really focused on this point; the rest of Cicilline’s opening statement, and much of the Democratic questioning, focused on what they perceived as illegal activities that caused economic harm, without necessarily tying that to political harm. Again, that’s not to say they were ignoring the linkage, but it wasn’t a priority.

What made this stand out was that Republicans were focused almost entirely on the politics of monopoly, specifically their contention that large platforms, particularly Google and Facebook (and Twitter), were censoring conservative viewpoints and working to elect Democratic candidates to office, particularly the presidency, and that this was a problem because of their dominance. Leave aside, if you can, your opinion about the veracity of these complaints (and remember my note at the beginning about focusing on analysis): while the Republicans were certainly not endorsing the “New Brandeis School” — Ranking Member James Sensenbrenner in particular took care to highlight support for the consumer welfare standard, also known as the “Chicago School” — their concern with the size of tech companies had nothing to do with economic effects and everything to do with political effects. It was a striking contrast.

Begging the Question

One of the more humorous lines of questioning, at least for language nerds, came courtesy of Republican Representative Matt Gaetz:

I want to talk about Search because that’s an area where I know Google has real market dominance. On December 11th, you testified to the Judiciary Committee, and in response to a question from my colleague Zoe Lofgren about Search, you said, “We don’t manually intervene on any particular search result.” But leaked memos obtained by The Daily Caller show that that isn’t true. In fact, those memos were altered December 3rd, just a week before your testimony. And they describe a deceptive news blacklist and a process for developing that blacklist approved by Ben Gomes, who leads Search with your company. And also something called a fringe ranking, which seems to beg the question, who gets to decide what’s fringe?

And in your answer, you said to Ms. Lofgren that there is no manual intervention of search. That was your testimony, but … And now I’m going to cite specifically from this memo from The Daily Caller. It says that the … I’m sorry, that The Daily Caller obtained from your company. It says, “The beginning of the workflow starts when a website is placed on a watch list.” It continues, “This watch list is maintained and stored by Ares with access restricted to policy and enforcement specialists.” Sort of does beg the question who these enforcement specialists are?

First off, note that this is an example of Republicans linking dominance to concerns about censorship. The point about language, though, is that Gaetz is using the phrase “begs the question” incorrectly; I know this, because I used to make the same mistake, until a reader graciously corrected me a couple of years ago. What Gaetz meant to say was “raises the question”; “begs the question”, on the other hand, to use Wikipedia’s definition, is:

An informal fallacy that occurs when an argument’s premises assume the truth of the conclusion, instead of supporting it. It is a type of circular reasoning: an argument that requires that the desired conclusion be true. This often occurs in an indirect way such that the fallacy’s presence is hidden, or at least not easily apparent.

For an example of this logical fallacy at work, look no further than this antitrust hearing, and Cicilline’s concluding statement:

Today, we had the opportunity to hear from the decision makers at four of the most powerful companies in the world. This hearing has made one fact clear to me. These companies, as exist today, have monopoly power. Some need to be broken up, all need to be properly regulated and held accountable.

If I may nitpick, this is obviously not true — Cicilline had decided well before this hearing that these companies have monopoly power. The problem is that a huge number of questions in the hearing took it as a given that these companies were monopolies, and proceeded to find rather common business practices as being major crimes. In other words, they begged the question.

One of the most striking examples of this fallacy — where it is assumed that a company is a monopoly, and therefore its actions are illegal, and because its actions are illegal it is a monopoly — was this exchange between Representative Jamie Raskin and Bezos:

Start with the HBO Max-on-Fire TV question. One of the first things you learn about conducting effective negotiations is that you want to negotiate about more things, not fewer. The reasoning is straightforward: if you are only negotiating about a single variable — in this example, Raskin believes that Amazon and HBO should only negotiate on price — the outcome is zero sum: every cent that Amazon wins is a cent that HBO loses. However, if you are able to introduce more variables, then you might find out that one company cares a lot about price, while the other company cares a lot about promotion (just to make up an example); in that case one company can get a better price and give up a lot of promotional opportunities, while the other can get a worse price and gain a lot of promotional opportunities, and thanks to their differing priorities, both feel like winners. That’s good negotiating!

It also appears to be, at least according to Raskin, illegal, because Amazon is “us[ing its] gatekeeper status role in the streaming device market to promote [its] position as a competitor in the video streaming market with respect to content.” That’s the problem though: there was zero evidence provided that Amazon has a monopolistic position in either streaming devices or video streaming; it was simply taken as fact, which made basic negotiating practices suspect, and evidence that Amazon was a monopoly. Begging the question.

Raskin’s question about Amazon’s acquisition of Ring was an even better example of the fallacy at work; while I don’t really understand why multivariate negotiations would be illegal even if you are a monopoly, there are clear antitrust issues raised by a monopolist acquiring a company for market share. Crucially, though, acquiring a company for market share if you are not a monopolist is not a crime.

It follows, then, that if Amazon had a monopoly in the home automation market, and acquired Ring for market share reasons, that could very well be an antitrust violation, but if they weren’t a monopoly, it would not be. What is critical to note is that you have to establish that Amazon has a monopoly first; only then can you decide if the acquisition was anticompetitive. Raskin, though, begs the question: the fact that Amazon acquired Ring for market share reasons is taken as evidence that Amazon has a monopoly, which then makes the acquisition illegal.

The same problem applied to Raskin’s final two complaints: Alexa defaulting to Amazon Prime Music, and recommending Amazon Basics. Those may be a problem if you first establish that Amazon has a monopoly in the relevant product areas, but it is not itself evidence that Amazon is a monopoly.

I’m focusing on this specific exchange, but the truth is that a combination of vilifying common business practices and begging the question was a consistent theme. Things like market research or copying competitor features or improving products were held up as obvious crimes and evidence of monopoly, when they were often not crimes at all, or only crimes if a monopoly in the relevant market had first been established. That is not to say that the committee’s investigation didn’t produce evidence of illegal anticompetitive actions, but rather that said evidence, such that there was, too often begged the question.

The GOP Bargain

The combination of the Republicans’ focus on the political aspects of antitrust and the tendency of the Democrats to see antitrust crimes even in normal business proceedings produced what was, I think, the most obvious political takeaway for tech companies: the Democrats have made up their minds (that tech is guilty), while the Republicans are willing to cut a deal.

The outline of that deal could not have been more obvious: Republicans are fine with the consumer welfare standard (which, as I noted back in 2016, inherently favors Aggregators) and tech’s business practices, as long as tech companies don’t “censor”; the alternating format of Congressional hearings placed these demands in direct contrast to Democratic assumptions of guilt. To put it in explicit terms: “We, Republicans, are your friends in Washington, but if you want us to defend you from the Democrats, you need to stop censoring conservatives.”

Again, it doesn’t matter that conservative websites tend to do particularly well on social media, or that the destruction of the media business model helped lay the groundwork for President Trump’s rise; Republicans expect that tech companies — by which they mostly mean Google and Facebook (and Twitter) — err on the side of not censoring or checking conservative content if they want help in Washington, because that help is not coming from the Democrats.

Tech’s United Front

Something that stood out from the four CEOs’ opening statements, and the general tenor of their defenses, was their insistence that they supported small-and-medium sized businesses.


20 years ago, we made the decision to invite other sellers to sell in our store, to share the same valuable real estate we’ve spent billions to build, market, and maintain. We believe that combining the strengths of Amazon Store with the vast selection of products offered by third parties would be a better experience for customers, and that the growing pie of revenue and profits would be big enough for all. We were betting that it was not a zero sum game. Fortunately, we were right. There are now, 1.7 million small-and-medium-sized businesses selling on Amazon.


One way we contribute is by building helpful products. Research found that free services like search, Gmail, maps, and photos provide thousands of dollars a year in value to the average American. And many are small businesses using our digital tools to grow. Stone Dimensions, a family owned stone company in Pewaukee, Wisconsin uses Google My Business to draw more customers. Gil’s appliances, a family owned appliance store in Bristol, Rhode Island credits Google analytics with helping them reach customers online during the pandemic. Nearly one third of small business owners say that without digital tools, they would have had to close all or part of their business during COVID.


What does motivate us is that timeless drive to build new things that we’re proud to show our users. We focus relentlessly on those innovations, on deepening core principles like privacy and security and on creating new features. In 2008, we introduced a new feature of the iPhone called the App Store launched with 500 apps, which seemed like a lot at the time, the App Store provided a safe and trusted way for users to get more out of their phone. We knew the distribution options for software developers at the time didn’t work well, brick-and-mortar stores charged high fees and have limited reach, physical media like CDs had to be shipped and were hard to update. From the beginning, the App Store was a revolutionary alternative. App Store developers set prices for their apps and never pay for shelf space.2


We’ve built services that billions of people find useful. I’m proud that we’ve given people who’ve never had a voice before the opportunity to be heard, and given small businesses access to tools that only the largest players used to have.

This shared focus was notable for two reasons, one specific to these hearings, and one that tells a broader story about how the Internet is changing the world.

First off, probably the most obvious connective thread in the hearing was concern about these companies creating platforms and then favoring themselves unfairly. Amazon, for example, is accused of using data about third party sellers to inform its private-label goods strategy (and data from AWS); Google is accused of using data about search to keep users on its pages; Apple is accused of using its control of the App Store to favor its own apps; and Facebook is accused of using data about app usage to drive its acquisition strategy. What each of these companies is arguing is that focusing on a couple of disgruntled companies is to miss the larger picture, wherein these companies created those opportunities in the first place, and for exponentially more companies than those the Committee may have heard from.

What is particularly interesting, though, is that to the extent these companies are right it foretells both a new kind of economy and a new kind of political alignment. Zuckerberg’s summary was the shortest yet most explicit, perhaps because Facebook is the best example of this phenomenon; I wrote in Apple and Facebook:

This explains why the news about large CPG companies boycotting Facebook is, from a financial perspective, simply not a big deal. Unilever’s $11.8 million in U.S. ad spend, to take one example, is replaced with the same automated efficiency that Facebook’s timeline ensures you never run out of content. Moreover, while Facebook loses some top-line revenue — in an auction-based system, less demand corresponds to lower prices — the companies that are the most likely to take advantage of those lower prices are those that would not exist without Facebook, like the direct-to-consumer companies trying to steal customers from massive conglomerates like Unilever.

The Internet is best illustrated by the smiling curve, in which value flows to large Aggregators and Platforms on one side, and small businesses built with Internet assumptions about addressable markets (and Internet cost structures) on the other side, while the folks in the middle that built their businesses on owning distribution in a world of scarcity are increasingly obsolete.

That is why you regularly see strange political bedfellows, like Uber and drivers and riders versus taxi companies and politicians, or Airbnb and hosts versus hotels and, well, politicians, or these companies and their small business bases against newspapers, retailers, cross-platform software businesses, vertical aggregators and yes, politicians. Zuckerberg made this point on behalf of the tech industry as a whole:

We’re here to talk about online platforms, but I think the true nature of competition is much broader. When Google bought YouTube, they could compete against the dominant player in video, which was the cable industry. When Amazon bought Whole Foods, they could compete against Kroger’s and Walmart. When Facebook bought WhatsApp, we could compete against telcos who used to charge 10 cents a text message, but not anymore. Now people can watch video, get groceries delivered, and send private messages for free. That’s competition. New companies are created all the time, all over the world. And history shows that if we don’t keep innovating, someone will replace every company here today.

Companies that used to be big, at least before the big tech companies came along, have the most to lose from tech, but just because they are ill-equipped to compete does not mean they are representative of all businesses, particularly companies that only exist because these platforms and Aggregators exist.3

Tech’s Differing Prospects

That noted, just because there were similarities in their messaging does not mean that each tech company has similar prospects as far as potential regulation is concerned. From the companies that should be the least concerned to the most:

Apple: It was obvious that the committee only invited Apple because they wanted to say that they invited all of the large consumer tech CEOs. The questions for Cook were hilariously uninformed about the App Store, making it easy for Apple’s CEO to run out the clock (often without any interruption). This was certainly disappointing given that many of Apple’s policies are clearly anticompetitive (which, as I noted above, is different than being illegal), but for now the takeaway is that Congress doesn’t know and doesn’t care.

Facebook: Facebook was probably the biggest beneficiary of Democrats not focusing on political harm relative to economic harm; as I noted last year in Tech and Antitrust, there really isn’t much about the company’s business practices (post acquisitions) that are anticompetitive. There was an interesting back-and-forth about Facebook’s discriminatory willingness to deal as far as access to their friend graph is concerned, but for that to be illegal you have to first establish that Facebook is a monopoly.

On this point I thought the Committee’s questioning was frequently unfair: the fact that social networks that existed when Facebook was founded no longer do (MySpace, Friendster, etc.) was taken as evidence that Facebook is a monopoly, with zero acknowledgment of the rise of Snapchat, TikTok, iMessage, etc. Similarly, Facebook’s acquisition of Instagram was discussed as if it happened today, when Instagram has over a billion users, as opposed to 2012, when it had 30 million. To be sure, some saw the anticompetitive angle of that purchase at the time, but many more mocked the price; at a minimum we can all agree that judging decisions made in 2012 according to the facts of 2020 isn’t necessarily just.

Amazon: Amazon seemed to attract the most in-depth scrutiny from the committee (perhaps because of Kahn), and while the biggest focus was on the 3rd-party marketplace and Amazon’s private-label strategy, there was a clear attempt across multiple questioners to make the case that Amazon creates “innovation kill zones”, as Representative Joe Neguse put it, across all of its product lines. There was clearly a target on Bezos.

At the same time, as Bezos regularly noted, it is not clear in what markets Amazon has a monopoly, and if it is not a monopoly, a lot of the behavior lawmakers were objecting to is not illegal (and, as I noted above, may not be illegal regardless). Bezos also made the point that only the military has a higher approval rating than Amazon, and when it comes to politics, that still matters.

Google: I think that Google is in trouble. The company received the second greatest amount of specificity in its questions as far as competition topics go — Representative Pramila Jayapal’s questions about ad exchanges was particularly well-done, especially given the constraints of the format — but more importantly, at least far as the politics of this hearing is concerned, was revealed to have no friends.

Specifically, the price of the company pulling out of Project Maven and the Pentagon’s JEDI project because of concerns about collaborating with the U.S. military4 is that the GOP deal I detailed above is not on the table: Republicans pushed Pichai on not just censorship and election interference but also its refusal to support the military repeatedly, and it seems clear than if and when an antitrust case is brought against the company, it will have few defenders. That is a particularly big problem for Google because the antitrust case against the company is by far the most straightforward.

As I wrote last week before the hearing, I am glad that it occurred. Figuring out how to regulate tech companies — particularly Aggregators, that base their power on consumer welfare — will require new approaches, and probably new laws. Moreover, any such regulations will necessitate difficult trade-offs between competition, privacy, national security, etc. (I was grateful that Representative Kelly Armstrong highlighted how GDPR made big tech companies stronger), which again means that Congress is best situated to decide what tradeoffs we should make.

To that end, I think the hearing was more successful than the format made it seem: there is more clarity about both Democratic and Republican priorities, as well as potential new divisions driven by technology generally, and a finer-grained understanding of how individual companies raise different concerns specifically. No, this wasn’t “Mr. Smith Goes to Washington”, but then again that movie was made by a studio about to be convicted of acting anti-competitively.

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

  1. That is Khan sitting behind Cicilline []
  2. Yes, Cook is pretending like the Internet never existed as a distribution channel []
  3. Again, this is not to say that regulation isn’t necessary — see A Framework for Regulating Competition on the Internet []
  4. Incidentally, I think the real reason that Google pulled out of the JEDI project is that Google Cloud was not competitive with Azure and AWS; citing ethical concerns was a misguided attempt to claim a strategy credit that is coming back to bite the company in a major way []

India, Jio, and the Four Internets

One of the more pernicious mistruths surrounding the debate about TikTok is that this will potentially lead to the splintering of the Internet; this completely erases the history of China’s Great Firewall, started 23 years ago, which effectively cut China off from most Western services. That the U.S. may finally respond in kind is a reflection of reality, not the creation of a new one.

What is new is the increased splintering in the non-China Internet: the U.S. model is still the default for most of the world, but the European Union and India are increasingly pursuing their own paths.

The U.S. Model

The U.S. Internet model is a laissez-faire one, and it is hard to argue against its effectiveness. Not only is the technology sector the biggest driver of U.S. economic growth for many years now, but U.S. Internet companies have come to dominate most of the world, conveying U.S. soft power like McDonald’s and Hollywood on steroids. There are obvious downsides to this approach: the Internet’s lack of friction both leads to Aggregators dominating markets and creates communities both good and bad.

This article, though, is primarily focused on economics and politics, and in that regard the winners and losers of the U.S.’s approach are as follows:


  • Large U.S. tech companies operate freely in the U.S., giving them a large and profitable user base to fund expansion abroad.
  • New U.S. tech companies face relatively few barriers to entry, particularly in terms of regulation of content or data collection.
  • The U.S. government collects the vast majority of taxes from these U.S. companies, including from revenue generated abroad, and also sees the overall U.S. view of the world exported via U.S. tech companies, while also having access to the data of non-U.S. citizens.
  • U.S. citizens operate with a high degree of freedom online, although there are minimal restrictions on the collection of the data generated from doing so by private companies.
  • Non-U.S. citizens operate with a high degree of freedom online, although there are minimal restrictions on the collection of the data generated from doing so by private companies or the U.S. government.
  • Non-U.S. companies are free to operate in the United States without restriction, and in other countries that follow the U.S.’s approach.


  • Non-U.S. governments have limited control over U.S. tech companies, limited access to their revenues, and limited control over the spread of information.

My biases should be obvious: I definitely believe that the U.S. approach is the best one. Certainly many will quibble with the effect on new companies, given how Aggregators tend to dominate their markets, while others are focused on the collection of data; I am concerned that proposed solutions are worse than the harms, particularly given the consumer benefit of data factories. Still, as I noted yesterday, I believe the European Union Court of Justice makes a compelling case that the ability of the U.S. government to collect data from non-U.S. citizens is a serious privacy issue.

Those quibbles, though, serve to highlight a point we can all agree on: non-U.S. governments have a lot of legitimate complaints about the hegemony of U.S. tech companies.

The China Model

The driving impetus of the China model is, first and foremost, control over information. This is evidenced by the fact that not only does China control access to Western services at the network level, but also employs huge numbers of censors for the Internet within China, and expects Chinese Internet companies like Tencent or ByteDance to have thousands of censors of their own.

At the same time, the economic benefit of China’s approach for China can not be denied. China is the only country to rival the U.S. for the sheer size and breadth of its Internet companies, thanks to the combination of a massive market and the lack of competition. Moreover, this led to all sorts of innovation, as China’s leapfrog to mobile avoided the baggage of PC-assumptions that still limits many U.S. companies.

That noted, it is fair to wonder just how replicable the China model is. Smaller countries like Iran have instituted similar controls on U.S. tech companies, but without a market like China it is far more difficult to capture the economic upside of the Great Firewall. And, it should be noted, there are a lot of losers with the China model, including Chinese citizens.

The European Model

Europe, through regulations like GDPR and the Copyright Directive, along with last week’s court decision striking down the Privacy Shield framework negotiated by the European Commission and the U.S. International Trade Administration (and a previous decision striking down the Safe Harbor Privacy Principles framework), is splintering off into an Internet of its own.

This Internet, though, feels like the worst of all possible outcomes. On one hand, large U.S. tech companies are winners, at least relative to everyone else: yes, all of the regulatory red tape increases costs (and, for targeted advertising, may reduce revenue), but the impact is far greater on would-be competitors. To put it in allegorical terms, the E.U. is restricting the size of the castle even as it dramatically increases the moat.

E.U. citizens, meanwhile, are likely to see their data increasingly protected from the U.S. government, which is a win; other protections, meanwhile, seem unlikely to be particularly effective or outweigh the general annoyance and loss of relevance that comes from endless permission dialogs and non-targeted content. Moreover, per the previous point, the number of alternatives to established incumbents are likely to decrease, particularly relative to the U.S.

It also seems unlikely that European competitors will fill in the gap. Any company that wishes to achieve scale needs to do so in its home market first, before going abroad, but it seems far more likely that Europe will make the most sense as a secondary market for companies that have done the messy work of iterating on data and achieving product-market fit in markets that are more open to experimentation and impose less of a regulatory burden. Higher costs mean you need a greater expectation of success, which means a proven model, not a speculative one.

Worst of all, at least from the E.U.’s perspective, is that this approach doesn’t really have any upside for European governments. That’s the thing with rule by regulation: without a focus on growth it is harder to create win-win situations.

The Indian Model

The India market has always been a bit unique: while foreign companies have usually been unencumbered when it comes to digital goods, leading to a huge number of users for U.S. companies like Google and Facebook, and Chinese companies like TikTok, India has kept a much tighter leash when it comes to the physical layer of tech. This ranges from strong tariffs on electronics to a ban on foreign direct investment in things like e-commerce. Moreover, India has always been one of the most challenging markets in terms of Internet access and logistics.

At the same time, the Indian market is the most enticing in the world for both U.S. and Chinese tech companies, which have largely saturated their home markets. This has led to a regular number of collisions between foreign tech companies and India regulators, whether it be Facebook’s attempts to introduce Free Basics or WhatsApp payments, increasing restrictions on Amazon and Flipkart’s e-commerce operations, or most recently, the outright banning of TikTok on national security concerns.

Over the last few months, though, a way to square this circle has become apparent to U.S. tech companies in particular, and it portends a fourth Internet: invest in Jio Platforms.

The Jio Bet

Jio, the dominant telecoms network in India, is one of the all-time greatest examples of the power of building, and the outsized returns that come from betting on technology-enabled disruption. I described the economics of the bet by Mukesh Ambani, India’s richest man, in an April Daily Update:

The key to understanding Ambani’s bet is that while all of the incumbent mobile operators in India were, like mobile operators around the world, companies built on voice calls that layered on data, Jio was built to be a data network — specifically 4G — from the beginning.

  • 4G, unlike 2G and 3G, does not support traditional circuit-switched telephony services; voice calls are instead handled the same as any other data.
  • Because everything is data, 4G networks can be built with commodity hardware in a way that 2G and 3G networks cannot.
  • Because Jio was offering a data network, voice calls, which are relatively low bandwidth, were the cheapest services to offer, and capacity was effectively infinite.

To put it another way, Jio was a bet on zero marginal costs — or, at a minimum, drastically lower marginal costs than its competitors. This meant that the optimal strategy was — you know what is coming! — to spend a massive amount of money up front and then seek to serve the greatest number of consumers in order to get maximum leverage on that up-front investment.

That is exactly what Jio did: it spent that $32 billion building a network that covered all of India, launched with an offer for three months of free data and free voice, and once that was up, kept the free voice offering permanently while charging only a couple of bucks for data by the gigabyte. It was the classic Silicon Valley bet: spend money up front, then make it up on volume because of a superior cost structure enabled by the zero-marginal nature of technology.

What makes this story so compelling is the contrast to Facebook’s argument for Free Basics:

The end result is what Zuckerberg said must be done: hundreds of millions of Indians, a huge portion of them from the country’s poorest regions, were connected to the Internet. Unlike Free Basics, though, it was all of the Internet.

That actually undersells just how much better Jio is for Indians than Free Basics would have ever been: Zuckerberg had no plan for upending India’s old mobile order, where operators focused most of their investment on India’s largest cities and competed for the richest parts of society, charging so much that Andreessen could declare, with a straight face, that to not offer Free Basics was “morally wrong.” In that world, India’s poor may have had access to Facebook, but little more, since there would have been no reason for non-Free Basics companies to invest. Instead they not only have the whole Internet but companies from India to China to the United States competing to serve them.

I wrote that Daily Update on the occasion of Facebook investing $5.7 billion for a 10% stake into Jio Platforms; it turned out that was the first of many investments into Jio:

  • In May, Silver Lake Partners invested $790 million for a 1.15% stake, General Atlantic invested $930 million for a 1.34% stake, and KKR invested $1.6 billion for a 2.32% stake.
  • In June, the Mubadala and Adia UAE sovereign funds and Saudi Arabia sovereign fund invested $1.3 billion for a 1.85% stake, $800 million for a 1.16% stake, and $1.6 billion for a 2.32% stake, respectively; Silver Lake Partners invested an additional $640 million to up its stake to 2.08%, TPG invested $640 million for a 0.93% stake, and Catterton invested $270 million for a 0.39% stake. In addition, Intel invested $253 million for a 0.39% stake.
  • In July, Qualcomm invested $97 million for a 0.15% stake, and Google invested $4.7 billion for a 7.7% stake.

With that flurry of fundraising Reliance completely paid off the billions of dollars it had borrowed to build out Jio. What is increasingly clear, though, is that the company’s ambitions extend far beyond being a mere telecoms provider.

Jio’s Vision

Last Wednesday, after announcing Google’s investment in Jio Platforms at Reliance Industries’ Annual General Meeting, Ambani said:

I would like to first share with you the philosophy that animates Jio’s current and future initiatives. The digital revolution marks the greatest disruptive transformation in the history of mankind, comparable only to the appearance of human beings with intelligence capability on our planet about 50,000 years ago. It is comparable because man is now beginning to infuse almost limitless intelligence into the world around him.

We are today at the initial stages of the evolution of an intelligent planet. Unlike in the past this evolution will proceed with a revolutionary speed. Our world will change more unrecognizably in just eight remaining decades of the 21st century, than today’s world has changed from what it was 20 centuries ago. For the first time in history mankind has an opportunity to solve big problems inherited from the past. This will create a world of prosperity, beauty, and happiness for all. India must lead this change to create a better world. For this all our people and all our enterprises have to be enabled and empowered with the necessary technology infrastructure and capabilities. This is Jio’s purpose. This is Jio’s ambition.

The "Two Pillars of Jio" slide from Reliance's Annual Global Meeting

Friends, Jio is now the undisputed leader in India with the largest customer base, the largest share of data and voice traffic, and a world-class next-generation broadband network that covers the length and the breadth of our country…Jio’s vision stands on two solid pillars. One is digital connectivity and the other is digital platforms.

In short, Jio is determined to achieve the dream that has long eluded telecom providers in other countries: moving up the stack from fixed-cost infrastructure to high-margin services. Ambani’s vision is comprehensive:

Jio's vision slides from Reliance's Annual Global Meeting

What gives Jio a chance are three important differences from telecom efforts in other markets:

  • First, Jio has created a huge portion of its addressable market; whereas a Verizon in the U.S., or a NTT DoCoMo in Japan was seeking to offer services on top of a competitive telecom market, Jio is the only option for a huge number of Indians (and for those that have options, Jio is so much cheaper because of its IP-based network that it can afford the extra costs).
  • Second, instead of seeking to usurp companies like Facebook or Google that already have major marketshare in India, Jio is partnering with them.
  • Third, Jio is positioning itself as an Indian champion, and the lynchpin of the Indian model.

Notice how Ambani introduced Jio’s 5G plans:

Jio’s global scale 4G and fiber network is powered by several core software technologies and components that have been developed by the young Jio engineers right here in India. This capability and know-how that Jio has developed positions Jio on the cutting edge of another exciting frontier: 5G.

Today friends, I have great pride in announcing that Jio has designed and developed a complete 5G solution from scratch. This will enable us to launch a world-class 5G service in India using 100% homegrown technology and solution. This made in India 5G solution will be ready for trials as soon as 5G spectrum is available, and can be ready for field deployment next year. And because of Jio’s converged all-IP network architecture we can easily upgrade our 4G network to 5G.

Once Jio’s 5G solution is proven at India-scale, Jio platforms would be well-positioned to be an exporter of 5G solutions to other telecom operators globally as a complete managed service. I dedicate Jio’s 5G solution to our Prime Minister Shri Narendra Modi’s highly motivating vision of ‘Atmanirhbhar Bharat’.

The "Motivations" slide from Reliance's Annual Global Meeting

Friends, Jio Platform is conceived with this vision of developing original captive intellectual property using which we can demonstrate the transformative power of technology across multiple industry ecosystems, first in India, and then confidently offering these Made-in-India solutions to the rest of the world.

Make no mistake: Jio’s network and its work on 5G, which takes years, was by definition not motivated by a phrase Prime Minister Modi first deployed two months ago. Rather, Ambani’s dedication hinted at the role Jio investors like Facebook and Google are anticipating Jio will play:

  • Jio leverages its investment to become the monopoly provider of telecom services in India.
  • Jio is now a single point of leverage for the government to both exert control over the Internet, and to collect its share of revenue.
  • Jio becomes a reliable interface for foreign companies to invest in the Indian market; yes, they will have to share revenue with Jio, but Jio will smooth over the regulatory and infrastructure hurdles that have stymied so many

What is fascinating about this approach is that the list of winners and losers gets pretty muddled pretty quickly. On one hand, Jio brought the Internet to hundreds of millions of Indians that would never have had access, and the benefits of that investment are only going to increase as Jio’s services and partnerships come on line. On the other hand, locking in a monopolistic player, particularly in the context of a government that has shown a desire for more control over the flow of information is a real downside.

The economic outcomes are just as muddled. Monopolies always have deadweight loss; then again, if an efficient market means that all of the profits flow to Silicon Valley, why should India particularly care about efficiency? In a Jio-mediated market it is U.S. tech companies that make less than they would have, and not only does India collect more taxes along the way, Jio’s vision of being a national champion abroad could be a huge win for India in the long run.

The Indian Counterweight

It is increasingly impossible — or at least irresponsible — to evaluate the tech industry, in particular the largest players, without considering the geopolitical concerns at stake. With that in mind, I welcome Jio’s ambition. Not only is it unreasonable and disrespectful for the U.S. to expect India to be some sort of vassal state technologically speaking, it is actually a good thing to not only have a counterweight to China geographically, but also a counterweight amongst developing countries specifically. Jio is considering problem-spaces that U.S. tech companies are all too often ignorant of, which matters not simply for India but also for much of the rest of the world.

Still, Facebook, Google, Intel, Qualcomm, et al should proceed with their eyes wide-open: they are very much a means to an end for a company and a country that is on its own path. That is not to say these investments are not a good idea — I think they are — but India’s path is perhaps a more populist and nationalistic one than many Americans would prefer. Still, it is less antagonistic to Western liberalism than the Chinese Communist Party, and again, an important counterweight.

The only question left, then, is whither Europe, and frankly, the picture is not pretty:

The Four Internets

What differs Europe’s Internet from the U.S., Chinese, or Indian visions is, well, the lack of vision. Doing nothing more than continually saying “no” leads to a pale imitation of the status quo, where money matters more than innovation.

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

The TikTok War

Over the last week, as the idea of banning TikTok in the U.S. has shifted from a fringe idea to a seeming inevitability (thanks in no small part to India’s decision to do just that), those opposed to the idea and those in support seem to be talking past each other. The reasons for this disconnect go beyond the usual divisions in tech, culture, and national security: what makes TikTok so unique is that it is the culmination of two trends: one about humans and the Internet, and the other about China and ideology.

The Analog World

It is always tricky to look at the analog world if you are trying to understand the digital one. When it comes to designing products, a pattern you see repeatedly is copying what came before, poorly, and only later creating something native to the medium.

Consider text: given that newspapers monetized by placing advertisements next to news stories, the first websites tried to monetize by — you guessed it — placing advertisements next to news stories. This worked, but not particularly well; publishers talked about print dollars and digital dimes, and later mobile pennies. Sure, the Internet drew attention, but it just didn’t monetize well.

What changed was the feed, something uniquely enabled by digital. Whereas a newspaper had to be defined up-front, such that it could be printed and distributed at scale, a feed is tailored to the individual in real-time — and so are the advertisements. Suddenly it was print that was worth pennies, while the Internet generally and mobile especially were worth more than newspapers ever were.

At the same time, while mediums change, humans remain the same, and here analog history is helpful; last month I pointed out that while newspaper revenue grew throughout the latter half of the 20th century, circulation actually fell. It’s the same story when it comes to newspapers’ overall share of advertising:

Newspapers' declining share of advertising to TV

Assuming that advertising revenue is a reasonable proxy for attention, it turns out that humans like pictures more than text, and moving pictures most of all; so it has gone on the Internet. Once Facebook introduced the news feed the company quickly figured out that photos drove much more engagement; that meant that Instagram, a fledgling social network made of nothing but photos, was a tremendous threat and, once acquired, a tremendous opportunity.

Four years later, it was Instagram that Facebook used to counter Snapchat’s Stories feature, an even more immersive way of interacting with content than the feed. The point was not to win users back from Snapchat, but to prevent Instagram users from even trying Snapchat out; the gambit succeeded beautifully.

The Rise of TikTok

The rise of TikTok, though, suggests that Facebook didn’t learn the correct lesson from the Snapchat threat: while part of Snapchat’s allure was the possibility of creating a new network in an app predicated on chat and disappearing media, what made Stories particularly compelling is that the experience was closer to video. That meant there was an opportunity to focus on specifically that.

Of course Facebook had spent plenty of time trying to get video to work in its feed; flush with money from its targeted feed-based advertising the company lurched from initiative to initiative predicated on encouraging professional video makers to focus on Facebook instead of YouTube. The error the company made is obvious in retrospect: what has always made Facebook powerful is that its most valuable content is generated by its own users, yet the company was counting on 3rd-parties to make compelling videos.

You can understand Facebook’s thinking: while it is easy for users to create text updates, and, with the rise of smartphones, even easier to create pictures, producing video is difficult. Until recently, phone cameras were even worse at video than they were photos, but more importantly, compelling video takes some degree of planning and skill. The chances of your typical Facebook user having a network full of accomplished videographers is slim, and remember, when it comes to showing user-generated content, Facebook is constrained by who your friends are (the company got busted by the FTC for trying to switch posts from private to public).

All of this explains what makes TikTok such a breakthrough product. First, humans like video. Second, TikTok’s video creation tools were far more accessible and inspiring for non-professional videographers. The crucial missing piece, though, is that TikTok isn’t really a social network.

ByteDance and the Algorithm

This is where it is important to understand the history of ByteDance, TikTok’s Chinese owner. ByteDance’s breakthrough product was a news app called TouTiao; whereas Facebook evolved from being primarily a social network to an algorithmic feed, TouTiao was about the feed and the algorithm from the beginning. The first time a user opened TouTiao, the news might be rather generic, but every scroll, every linger over a story, every click, was fed into a feedback loop that refined what it was the user saw.

Meanwhile all of that data fed back into TouTiao’s larger machine learning processes, which effectively ran billions of A/B tests a day on content of all types, cross-referenced against all of the user data it could collect. Soon the app was indispensable to its users, able to anticipate the news they cared about with nary a friend recommendation in sight. That was definitely more of a feature than a bug in China, where any information service was subject to not just overt government censorship, but also an expectation of self-censorship; all the better to control everything that end users saw, without the messiness of users explicitly recommending content themselves (although that didn’t prevent ByteDance CEO Zhang Yiming from having to give a groveling apology for giving users too much low-brow content).

ByteDance’s 2016 launch of Douyin — the Chinese version of TikTok — revealed another, even more important benefit to relying purely on the algorithm: by expanding the library of available video from those made by your network to any video made by anyone on the service, Douyin/TikTok leverages the sheer scale of user-generated content to generate far more compelling content than professionals could ever generate, and relies on its algorithms to ensure that users are only seeing the cream of the crop. I noted while explaining what Quibi got wrong:

The single most important fact about both movies and television is that they were defined by scarcity: there were only so many movies that would ever be made to fill only so many theater slots, and in the case of TV, there were only 24 hours in a day. That meant that there was significant value in being someone who could figure out what was going to be a hit before it was ever created, and then investing to make it so. That sort of selection and production is what Katzenberg and the rest of Hollywood have been doing for decades, and it’s understandable that Katzenberg thought he could apply the same formula to mobile.

Mobile, though, is defined by the Internet, which is to say it is defined by abundance…So it is on TikTok, or any other app with user-generated content. The goal is not to pick out the hits, but rather to attract as much content as possible, and then algorithmically boost whatever turns out to be good…The truth is that Katzenberg got a lot right: YouTube did have a vulnerability in terms of video content on mobile, in part because it was a product built for the desktop; TikTok, like Quibi, is unequivocally a mobile application. Unlike Quibi, though, it is also an entertainment entity predicated on Internet assumptions about abundance, not Hollywood assumptions about scarcity.

To summarize:

  • Humans prefer video to photos to text
  • TikTok makes it easy to create videos, ensuring a massive supply of content (even if most of the supply is low quality)
  • TikTok relies on the algorithm to surface compelling content, and is not constrained by your social network

This both explains why TikTok succeeds, and why it is an app the United States ought to be concerned about.

China’s War

It was just over a year ago, after the U.S. government placed restrictions on selling components to Huawei, that I pushed back on declarations that tech was entering a cold war:

This is where I take the biggest issue with labeling this past week’s actions as the start of a tech cold war: China took the first shots, and they took them a long time ago. For over a decade U.S. services companies have been unilaterally shut out of the China market, even as Chinese alternatives had full reign, running on servers built with U.S. components (and likely using U.S. intellectual property).

To be sure, China’s motivation was not necessarily protectionism, at least in the economic sense: what mattered most to the country’s ruling Communist Party was control of the flow of information. At the same time, from a narrow economic perspective, the truth is that China has been limiting the economic upside of U.S. companies far longer than the U.S. has tried to limit China’s.

I can’t emphasize this point enough: one of the gravest errors made by far too many people in the U.S. is taking an exceptionally self-centered view of U.S.-China relations, where everything is about what the U.S. says and does, while China is treated like an NPC. Indeed, it is quite insulting to China, a great nation with a history far longer than that of the United States.

To that end, this long history looms large in how China thinks about its relationship to the U.S. specifically, and the West generally. China is driven to reverse its “century of humiliation”, and to retake what it sees as its rightful place as a dominant force in the world. What few in the West seem to realize, though, is that the Chinese Communist Party very much believes that Marxism is the means by which that must be accomplished, and that Western liberal values are actively hostile to that goal. Tanner Greer wrote in Tablet:

Xi Jinping endorsed this explanation for the Soviet collapse in a 2013 address to party cadres. “Why did the Soviet Union disintegrate?” he asked his audience. “An important reason is that in the ideological domain, competition is fierce!” The party leadership is determined to avoid the Soviet mistake. A leaked internal party directive from 2013 describes “the very real threat of Western anti-China forces and their attempt at carrying out westernization” within China. The directive describes the party as being in the midst of an “intense, ideological struggle” for survival. According to the directive, the ideas that threaten China with “major disorder” include concepts such as “separation of powers,” “independent judiciaries,” “universal human rights,” “Western freedom,” “civil society,” “economic liberalism,” “total privatization,” “freedom of the press,” and “free flow of information on the internet.” To allow the Chinese people to contemplate these concepts would “dismantle [our] party’s social foundation” and jeopardize the party’s aim to build a modern, socialist future.

Westerners asked to think about competition with China — a minority until fairly recently, as many envisioned a China liberalized by economic integration — tend to see it through a geopolitical or military lens. But Chinese communists believe that the greatest threat to the security of their party, the stability of their country, and China’s return to its rightful place at the center of human civilization, is ideological. They are not fond of the military machines United States Pacific Command has arrayed against them, but what spooks them more than American weapons and soldiers are ideas—hostile ideas they believe America has embedded in the discourse and institutions of the existing global order. “International hostile forces [seek to] westernize and divide China” warned former CPC General Secretary Jiang Zemin more than a decade ago, and that means that, as Jiang argued in a second speech, the “old international political and economic order” created by these forces “has to be changed fundamentally” to safeguard China’s rejuvenation. Xi Jinping has endorsed this view, arguing that “since the end of the Cold War countries affected by Western values have been torn apart by war or afflicted with chaos. If we tailor our practices to Western values … The consequences will be devastating.”

This is why it was not enough for China to have blocked Western social networks like Facebook or Twitter within China, but to also demand that Western entities like the NBA police Twitter content in the United States; I wrote at the time:

The problem from a Western perspective is that the links Clinton was so sure would push in only one direction — towards political freedom — turned out to be two-way streets: China is not simply resisting Western ideals of freedom, but seeking to impose their own.

This understanding of China’s belief that it is fighting an ideological war explains why the severe curtailing of freedom that happened in Hong Kong this month was inevitable; if the Party’s ideology is ultimately opposed to liberalism anywhere, “one country-two systems” were always empty words in service of China’s rejuvenation, and Marxism’s triumph. To see that reality, though, means taking China seriously, and believing what they say.

TikTok and Data

In that light, the latest TikTok news missed the mark, and ultimately, missed the point; from the New York Times:

Amazon on Friday asked its employees to delete the Chinese-owned video app TikTok from their cellphones, putting the tech giant at the center of growing suspicion and paranoia about the app. Almost five hours later, Amazon reversed course, saying the email to workers was sent in error.

In the initial email, which was obtained by The New York Times, Amazon officials said that because of “security risks,” employees must delete the app from any devices that “access Amazon email.” Employees had to remove the app by Friday to remain able to obtain mobile access to their Amazon email, the note said.

While traditional applications on Macs or PCs had full access to your computer — including your email — on modern smartphones apps exist in “sandboxes”, which, as John Gruber and I discussed on Dithering, are much more akin to a vault or a prison; apps can only access their own data, and a limited set of external data to which they are explicitly granted permission. In other words, banning TikTok because it is surreptitiously stealing your email doesn’t make technical sense.

That is not to say that TikTok is not capturing data: it is vacuuming up as much as it can, from your usage to your IP address to your contacts and location (if you gave the app permission). This, as many TikTok advocates note, is similar to what Facebook does.

This, to be clear, is absolutely true. It is also at this point where important differences emerge. First, Facebook is a U.S. company, and while TikTok claims that it is independent from ByteDance and stores data in the U.S. and Singapore, its privacy policy is clear:

We may share your information with a parent, subsidiary, or other affiliate of our corporate group.

That means that TikTok data absolutely can be sent to China, and, it is important to note, this would be the case even if the privacy policy were not so honest. All Chinese Internet companies are compelled by the country’s National Intelligence Law to turn over any and all data that the government demands, and that power is not limited by China’s borders. Moreover, this requisition of data is not subject to warrants or courts, as is the case with U.S. government requests for data from Facebook or any other entity; the Chinese government absolutely could be running a learning algorithms in parallel to ByteDance’s on all TikTok data.

If anything it would be a something of a surprise were it not; an important piece of China’s thousands of years of history is the presence of a bureaucracy focused on collecting data on, well, everyone and everything. I see examples of it here in Taiwan, where my household is registered, cameras are everywhere (and routinely accessed), and cellphone data is a pandemic fighting tool, and this is a democratic country based on liberal values. China, which combines this tradition with a totalitarian government, takes data collection to the max. Facial recognition is omnipresent, nearly all transactions, even in the real world, are digital, and social networks like WeChat are completely open to censors, both from Tencent and the government; the government even hacks your computers as a matter of policy. Given this reality it is completely reasonable to be concerned about TikTok data!

That, though, is not the primary risk: what should truly concern Americans is the algorithm.

TikTok’s Algorithm

Last month, after President Trump held a rally in Tulsa with a far-smaller crowd than he anticipated, the New York Times suggested that TikTok might be responsible:

President Trump’s campaign promised huge crowds at his rally in Tulsa, Okla., on Saturday, but it failed to deliver. Hundreds of teenage TikTok users and K-pop fans say they’re at least partially responsible…

TikTok users and fans of Korean pop music groups claimed to have registered potentially hundreds of thousands of tickets for Mr. Trump’s campaign rally as a prank. After the Trump campaign’s official account @TeamTrump posted a tweet asking supporters to register for free tickets using their phones on June 11, K-pop fan accounts began sharing the information with followers, encouraging them to register for the rally — and then not show.

Leaving aside whether or not the TikTok campaign or coronavirus concerns were responsible for the low turnout, I actually am inclined to believe that this movement on the video service was genuine. It is important to note, though, that there is no way we can know for sure, and, to the extent that TikTok actually did have an impact on the rally, that should frighten people of all political persuasions.

After all, this certainly wasn’t the first time that TikTok has seemed to act politically: the service censored #BlackLivesMatter and #GeorgeFloyd, blocked a teenager discussing China’s genocide in Xinjiang, and blocked a video of Tank Man. The Guardian published TikTok guidelines that censored Tiananmen Square, Tibetan independence, and the Falun Gong, and I myself demonstrated that TikTok appeared to be censoring the Hong Kong protests and Houston Rockets basketball team.

The point, though, is not just censorship, but its inverse: propaganda. TikTok’s algorithm, unmoored from the constraints of your social network or professional content creators, is free to promote whatever videos it likes, without anyone knowing the difference. TikTok could promote a particular candidate or a particular issue in a particular geography, without anyone — except perhaps the candidate, now indebted to a Chinese company — knowing. You may be skeptical this might happen, but again, China has already demonstrated a willingness to censor speech on a platform banned in China; how much of a leap is it to think that a Party committed to ideological dominance will forever leave a route directly into the hearts and minds of millions of Americans untouched?

Again, this is where it is worth taking China seriously: the Party has shown through its actions, particularly building and maintaining the Great Firewall at tremendous expense, that it believes in the power of information and ideas. Countless speeches, from Chairman Xi and others, have stated that the Party believes it is in an ideological war with liberalism generally and the U.S. specifically. If we are to give China’s leaders the respect of believing what they say, instead of projecting our own beliefs for no reason other than our own solipsism, how can we take that chance?

A Reluctant Prescription

I am not a China absolutist; to give one timely example, while I mourn the end of a free and vibrant Hong Kong that I have had the pleasure of visiting on multiple occasions, I am unmoved by complaints about China’s promised adherence to the Basic Law; it has become clear that was a means to the end of reclaiming Hong Kong from a colonial power,1 and Hong Kong is unquestionably a Chinese city, ultimately subject to Chinese law. Similarly, I abhor and condemn and encourage all to speak out about what is happening to Uighur’s in Xinjiang, but I am not counseling U.S. intervention.

What is increasingly clear, though, is that China’s insistence that the West ignore the country’s “internal affairs” is a sentiment that is not reciprocated; the list of Western companies bullied by China for Western content is long and growing, the country is flooding Twitter and Facebook with coronavirus propaganda, and is leveraging WeChat to spread misinformation and to surveil the Chinese diaspora.

In short, I believe it is time to take China seriously and literally: the Communist Party is not only ideologically opposed to liberalism, it believes that only one of liberalism or Marxism can prevail. To that end it has been taking action for over 20 years to control information within its borders and, over the last several years, to control information outside of its borders. It is time for the U.S. to respond, both on the government level and corporate level, and it should do so in a multi-faceted fashion.

First, data security is absolutely a concern. To that end all companies that deal with valuable intellectual property or national security-related information should ban the use of WeChat by any of their employees, as should the government; it is simply too easy to pass information, even by accident. In addition, that same group of companies and governments should not use Zoom until the (American) company has shifted the bulk of its engineering out of China and demonstrated vastly improved corporate controls.

What matters more in an ideological war, though, is influence, and that is why I do believe that ByteDance’s continued ownership of TikTok is unacceptable. My strong preference would be for ByteDance to sell TikTok to non-Chinese investors or a non-Chinese company, by which I mean not-Facebook. TikTok is not only a brilliant app that figured out video on mobile, it is also shaping up to be a major challenge to Facebook’s hold on attention and thus, in the long run, advertising. This would be a very good thing, and I fear that simply banning TikTok will simply leave the market to Instagram Reels, Facebook’s TikTok clone.

However, if ByteDance is unwilling to sell, then the U.S. government should be willing to act. One possible route is a review of ByteDance’s acquisition of by the Committee on Foreign Investment in the United States (CFIUS), or invoking the International Emergency Economic Powers Act (IEEPA), which would require declaring a national emergency; I would prefer that Congress take the lead. What is notable is that because of the dominance of the iOS App Store and Google Play Store there is no need for an ISP-level firewall; Apple and Google can not only remove TikTok from the App Store, they could, if ordered, make already-installed apps unusable.

This is, without question, a prescription I don’t come to lightly. Perhaps the most powerful argument against taking any sort of action is that we aren’t China, and isn’t blocking TikTok something that China would do? Well yes, we know that is what they would do, because the Chinese government has blocked U.S. social networks for years. Wars, though, are fought not because we lust for battle, but because we pray for peace. If China is on the offensive against liberalism not only within its borders but within ours, it is in liberalism’s interest to cut off a vector that has taken root precisely because it is so brilliantly engineered to give humans exactly what they want.

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

  1. This originally said, “that was an agreement imposed on China by a colonial power” which is not technically correct; the point I was trying to make is that China promulgated the Basic Law as a response to British rule, not because it believed in it []

The Slack Social Network

On November 2, 2016, Microsoft announced Teams at a special event in New York City. Slack decided to mark the occasion:

The text of the ad was condescension cloaked in congratulations:

Dear Microsoft,

Wow. Big news! Congratulations on today’s announcements. We’re genuinely excited to have some competition.

We realized a few years ago that the value of switching to Slack was so obvious and the advantages so overwhelming that every business would be using Slack, or “something just like it,” within the decade. It’s validating to see you’ve come around to the same way of thinking. And even though — being honest here — it’s a little scary, we know it will bring a better future forward faster.

However, all this is harder than it looks. So, as you set out to build “something just like it,” we want to give you some friendly advice.

Slack’s “advice” was, naturally, self-serving, at least in terms of how the startup saw their advantages relative to Microsoft; to quote the ad:

  • It’s not the features that matter
  • An open platform is essential
  • You’ve got to do this with love

The advertisement added under that last point:

We love our work, and when we say our mission is to make people’s working lives simpler, more pleasant, and more productive, we’re not simply mouthing the words. If you want customers to switch to your product, you’re going to have to match our commitment to their success and take the same amount of delight in their happiness.

Two-and-a-half years later Teams passed Slack in daily active users (DAUs). On the company’s last earnings call CEO Satya Nadella revealed that Teams had 75 million daily active users; Slack hasn’t provided a post-pandemic-onset DAU number, but had 12 million last October (Microsoft’s pre-pandemic number was 32 million in early March). And while Slack’s ad may have welcomed Microsoft as a competitor, now CEO Stewart Butterfield is saying that Teams isn’t a competitor after all.

Fortunately for Slack, that is increasingly true.

Microsoft Strikes Back

I have long quipped that most of Silicon Valley has serially underestimated Facebook because it is the social network of friends and family, and many people in tech are trying to escape said friends and family. You can say the same thing about Microsoft: while the company was once the disruptive upstart, for decades it has been the default for all of those businesses that Silicon Valley is seeking to disrupt. Ergo, if those businesses are surely doomed, then so is Microsoft.

Moreover, just as Twitter is the social network of choice within the tech ecosystem, the vast majority of Silicon Valley companies host their email with Google and use Google’s productivity software, or one of the myriad of offerings seeking to usurp documents or spreadsheets or presentations. And even when it comes to the cloud, the choice for startups is usually between AWS and Google Cloud Platform. Microsoft is out-of-sight and out-of-mind.

And then something mysterious occurs; an enterprise SaaS company will grow like a weed, getting buzz amongst investors and the press that covers them, raise rounds for growth, perhaps even IPO, and then, well, Teams versus Slack happens:

Teams versus Slack growth

The obvious reason for Teams’ success relative to Slack is the oldest tactic in the book: Teams is free, and Slack isn’t. Well, technically, Teams requires an Office Microsoft 365 subscription (although yes, there are free versions of both Teams and Slack), but as Slack itself notes, a good portion of its addressable market has exactly that. In other words, the effective choice is exactly what I stated: “free” versus paid.

Moreover, while Slack concluded its advertisement by talking about how difficult it would be for Microsoft to convince Slack users to “switch” to Teams, switching was never the goal: just as Facebook created Instagram Stories to remove the impetus for new users to even try Snapchat, Teams is particularly effective as a way to prevent a Microsoft customer from even trying Slack. And, in that case, it doesn’t matter how much “love” Slack put into its product: said love was not simply unrequited, but unexperienced.

Still, it is not as if all of those Teams users started using the program because they were inspired by Slack: Microsoft has a huge sales team with relationships that go back years, and a massive partner network that serves companies that are too small to sell to directly; I wrote about the latter when Teams passed Slack:

I am sure it was not a coincidence that this announcement happened in the middle of Microsoft’s annual partner conference in Las Vegas. Most of the media pays much more attention to Microsoft’s Build developer conference in the spring, but that is because writing about products is much easier than writing about ecosystems, particularly when it comes to enterprise.

Microsoft’s partner network is a truly gargantuan moat. When it comes to enterprise, it is easy to focus on the biggest companies, where Microsoft will engage directly, and challengers like Slack can build up sales forces to compete. Underneath those companies, though, are tens of thousands of smaller businesses that, even if they have IT directors of their own, rely on outside vendors to build up their technical infrastructure. Here Microsoft has invested heavily in training and equipping these vendors; critically, the company also overhauled its incentive program such that it shares its subscription revenue for Azure and Office 365 with its partners, as opposed to one-off payments for acquiring customers.

The result is that these partners are heavily motivated to offer and implement Microsoft-centric solutions: not only does everything (generally) work together, they also make more money in the process. This, then, is the context of the Teams daily active users announcement: Microsoft wasn’t simply pounding its chest, it was sending a message to its partners that pushing Teams is a winning strategy.

The key is integration.

Microsoft’s Integration

Any discussion of integration and modularization in the context of technology inevitably casts Microsoft as the ultimate example of the latter, particularly relative to Apple. In truth, though, while Windows ran on whatever hardware you wished to throw at it, the company’s software products have always been designed to work together, particularly in the enterprise. Windows Server came with Active Directory, which undergirded Microsoft Exchange, which users accessed via Outlook on their Windows computers that, of course, ran the rest of the Office suite better than anything else. It was, frankly, a pain in the rear end to try and switch out any of the pieces, which Microsoft leveraged to not only lock in its position, but also drive continual upgrades, which it used to justify subscription pricing years before the rest of Silicon Valley discovered the SaaS business model.

The combination of cloud and mobile started to break this integration apart: Microsoft’s misguided Windows-centric strategy meant that Office wasn’t available on the dominant mobile platforms, which drove companies to search out cloud-based alternatives, which made them much easier to both trial and support. That is why it was so important that Satya Nadella’s first public appearance as CEO was announcing Office for iPad, and why his greatest triumph was The End of Windows.

The end of Windows as the center of Microsoft’s approach, and the shift to the cloud, though, did not mean the end of Microsoft’s focus on integration, or its attempt to be an operating system; the company simply changed its definition of what an operating system was; Satya Nadella said at a press briefing in 2019:

The other effort for us is what we describe as Microsoft 365. What we are trying to do is bring home that notion that it’s about the user, the user is going to have relationships with other users and other people, they’re going to have a bunch of artifacts, their schedules, their projects, their documents, many other things, their to-do’s, and they are going to use a variety of different devices. That’s what Microsoft 365 is all about.

Sometimes I think the new OS is not going to start from the hardware, because the classic OS definition, that Tanenbaum, one of the guys who wrote the book on Operating Systems that I read when I went to school was: “It does two things, it abstracts hardware, and it creates an app model”. Right now the abstraction of hardware has to start by abstracting all of the hardware in your life, so the notion that this is one device is interesting and important, it doesn’t mean the kernel that boots your device just goes away, it still exists, but the point of real relevance I think in our lives is “hey, what’s that abstraction of all the hardware in my life that I use?” – some of it is shared, some of it is personal. And then, what’s the app model for it? How do I write an experience that transcends all of that hardware? And that’s really what our pursuit of Microsoft 365 is all about.

This is where Teams thrives: if you fully commit to the Microsoft ecosystem, one app combines your contacts, conversations, phone calls, access to files, 3rd-party applications, in a way that “just works”; I explained my personal experience with Teams in a December 2018 Daily Update:

Here’s the thing, though: Dropbox absolutely is better than One Drive. Google Apps are better at collaboration than Microsoft’s Office apps. Asana is better than Planner. And, to be very clear, Slack is massively better than Teams at chat. Using all of them together, though, well, it sucks: the user experience that matters for me is not any one app but all of them at once, and for the way I want to work, having everything organized in one single place is simply better (and that’s even with the normal spate of maddening Microsoft UI oddities!). In this Teams is less a chat app than it is a file explorer for the cloud generally, and Stratechery LLC specifically.

This is what Slack — and Silicon Valley, generally — failed to understand about Microsoft’s competitive advantage: the company doesn’t win just because it bundles, or because it has a superior ground game. By virtue of doing everything, even if mediocrely, the company is providing a whole that is greater than the sum of its parts, particularly for the non-tech workers that are in fact most of the market. Slack may have infused its chat client with love, but chatting is a means to an end, and Microsoft often seems like the only enterprise company that understands that.

Slack Connect

This left Slack in a very vulnerable position: Teams was “free”, supported by Microsoft’s sales teams and partner network, and, from a certain perspective, was actually easier to use. Unless your job was to chat all day, why choose Slack? In fact, that was the solution: what Slack has done over the last few years is make chat itself into a moat, not just by being better at it, but by expanding who it is you can chat with.

The key piece is Shared Channels, which officially launched in 2019, after a seemingly interminable two-year beta period. From the announcement on Slack’s blog:

Millions of people use Slack every day as a better way to get work done: with faster and more effective collaboration, deeper connections with colleagues, and seamless integrations with the apps and programs we use every day. But what about all the work that happens outside our organizations—with vendors, partners, contractors? Why compromise there?

For that, there’s shared channels, a new feature that allows Slack teams in different organizations to use Slack to collaborate together as easily and productively as they do internally. It’s officially out of beta today and available for all paid plans.

A shared channel works just like a normal Slack channel, only now connecting organizations. This means a team from Company A is communicating in the same Slack channel as their partners at Company B. New people coming into a project can readily access a project’s archive, allowing them to ramp up swiftly. Teams can easily share updates and files, loop in the right people, and quickly make decisions—all from a single place in Slack.

Shared Channels are a far more compelling feature than Slack’s attempt at a platform, particularly when it comes to accentuating the ways in which Slack is better than Teams. First, chat is the point, not integrating with toolchains that are probably different on a company-by-company basis, which lets Slack’s strengths as a chat client come to the forefront. Second, because Slack is not deeply integrated with a bunch of other applications, it is actually easier for it to horizontally connect different companies. Third, being first actually matters.

Consider Slack Connect, which the company announced late last month:

For years, Slack has been changing the way millions of people work together within their organizations. By shifting internal communication out of inboxes and into channels, teams can work more transparently with each other and get more done. But we know the work doesn’t stop at a company’s walls. That’s why today, we’re taking the next step and bringing all the benefits of Slack to everyone you work with, both inside and outside your organization. Introducing Slack Connect: a more secure and productive way for organizations to communicate together.

More than four years in the making and developed with customers, Slack Connect is a secure communications environment that lets you move all the conversations with your external partners, clients, vendors and others into Slack, replacing email and taking business collaboration to the next level…Starting today, up to 20 organizations can come together in a single Slack channel, enabling customers to bring even more of their external ecosystem into Slack—such as their entire supply chain, corporate subsidiaries or industry peers.

Slack Connect is about more than chat: not only can you have multiple companies in one channel, you can also manage the flow of data between different organizations; to put it another way, while Microsoft is busy building an operating system in the cloud, Slack has decided to build the enterprise social network. Or, to put it in visual terms, Microsoft is a vertical company, and Slack has gone fully horizontal:

Slack is going horizontal; Microsoft is vertical

This doubles down on all of the advantages of shared channels. The user experience of chat specifically is what matters; the only reason this is even possible is because Slack is focused on one specific part of the stack, and the more companies that take advantage of Slack Connect the more of a moat Slack has. That’s the thing about social networks: their best feature is whether or not your friends are on it, or, in this case, whether or not the companies you are working with are using Slack.

I certainly find it compelling: it is hard to imagine how the Stratechery podcast service would have been built without shared channels, which means that yes, I pay for both Microsoft 365 and Slack, and happily so. Moreover, I can’t imagine ever not paying — Stratechery LLC is already tied into 4 other companies, and that number will only go up. It appears that Slack has learned the lesson all successful companies must learn: idealistic statements — or advertisements — about building with “love” are a lot less useful than actually understanding what solutions you can build that both solve customer problems and give your product a moat in the process.

Slack’s shift into being an enterprise social network is not necessarily bad news for Microsoft; if anything it removes a potential contender for the enterprise cloud OS. It does, though, raise the question of who will actually build the modular alternative to Microsoft?

The obvious answer is Google: the company has both the resources and, in the case of G Suite, the core products to do so. The biggest obstacle is that the search company is the exception that proves the rule: Google search won simply by being better, in a market that was both desperate for what the company built, and completely open. A better search engine really was just a click away.

The problem this presents to Google’s enterprise efforts is that the company has never learned how to listen to customers, how to sell, or how to build an ecosystem. Yes, Android has as many apps as you might want, but that is more a function of just how massive the mobile opportunity is (which is why Apple can be a rent-seeking platform for developers yet have a huge ecosystem). Creating a full stack alternative to Microsoft filled with best-of-breed apps will require capabilities that Google has never really demonstrated.

For that reason, while Microsoft still needs to learn how to capture new companies, its moat with most of the enterprise market appears as strong as ever; Slack deserves credit for carving out its own.

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

Apple and Facebook

When it comes to the big four consumer tech companies — Microsoft’s decision to close its retail stores was the culmination of a step-back from the consumer space five years in the making — Google and Amazon have always had moats that were easier to understand. Google has a huge advantage in data and infrastructure, augmented by its control of consumer touch points (by owning Android outright, and paying heavily for default placement on other platforms); Amazon has a huge advantage in infrastructure and data, augmented by its control of the number one consumer touch point for shopping (the Amazon search box). Building a competitor for either feels daunting at best, impossible at worst.

Apple’s Moat

Apple, though, faced questions about the sustainability of its business for years, even after the runaway success of the iPhone; one of the topics that helped Stratechery gain traction in its first year was arguing that the iPhone was actually not about to be disrupted as so many — including Professor Clayton Christensen himself — were sure was going to happen. I explained why Apple’s approach was sustainable in 2014’s Best:

Moreover, integrated solutions will just about always be superior when it comes to the user experience: if you make the whole thing, you can ensure everything works well together, avoiding the inevitable rough spots and lack of optimization that comes with standards and interconnects. The key, though, is that this integration and experience be valued by the user. That is why — and this was the crux of my criticism of Christensen’s development of the theory — the user experience angle only matters when the buyer of a product is also the user. Users care about the user experience (surprise), but an isolated buyer — as is the case for most business-to-business products, and all of Christensen’s examples — does not. I believe this was the root of Christensen’s blind spot about Apple, which persists. From an interview with Henry Blodget a month ago:

You can predict with perfect certainty that if Apple is having that extraordinary experience, the people with modularity are striving. You can predict that they are motivated to figure out how to emulate what they are offering, but with modularity. And so ultimately, unless there is no ceiling, at some point Apple hits the ceiling. So their options are hopefully they can come up with another product category or something that is proprietary because they really are good at developing products that are proprietary. Most companies have that insight into closed operating systems once, they hit the ceiling, and then they crash.

That’s the thing though: the quality of a user experience has no ceiling. As nearly every other consumer industry has shown, as long as there is a clear delineation between the top-of-the-line and everything else, some segment of the user base will pay a premium for the best. That’s the key to Apple’s future: they don’t need completely new products every other year (or half-decade); they just need to keep creating the best stuff in their categories. Easy, right?

It’s not easy, of course, and yet when it comes to hardware in particular, Apple’s lead is greater than it ever was, thanks in large part to its superior systems-on-a-chip; the headline news from WWDC was that Apple is extending that particular advantage to the Mac.

Of course having the best device is not enough either — this was the other reason why Apple was, according to many, eternally doomed; here is Blodget again in Business Insider, in 2013:1

If smartphones and tablets were not a platform — if the only thing that mattered to the value of the product and a customer’s purchase decision was the gadget itself — then Apple’s loss of market share would not make a difference. Apple zealots would be correct when they smugly assert that what matters is Apple’s “profit share” not “market share.”

But smartphones and tablets are a platform. Third-party companies are building apps and services to run on smartphone and tablet platforms. These apps and services, in turn, are making the platforms more valuable. Consumers are standardizing their lives around the apps and services that run on smartphone and tablet platforms. Because of these “network effects,” in platform markets, dominant market share is huge competitive advantage. In platform markets, as the often-hated but always insanely powerful Microsoft demonstrated for decades in the PC market, the vast majority of the power and profits eventually accrue to the market-share leader.

In fact, it turned out that Apple’s prioritization of the user experience wasn’t simply a moat, but also a point of leverage with developers, who need Apple much more than Apple needs them. Thus the second big story over the last two weeks, which has been Apple’s App Store policies: it appears that Apple has significantly tightened its unwritten rules over the last year as the company seeks to increase its Services revenue. Developers, from the smallest to the largest, have no choice but to accede to the iPhone maker’s demands because Apple has combined the loyalty of the most valuable users with App Review, an unavoidable gatekeeper in terms of getting apps onto those users’ iPhones.

The Bill Gates Line

Facebook, meanwhile, is often thought of as being the opposite of Apple: Apple sells products, and Facebook sells advertising. Apple minimizes data collection, and Facebook maximizes it. Apple is a platform, and Facebook is just an app.

What both share, though, is a sort of eternal skepticism from Silicon Valley in particular. Facebook, for its part, has been doubted from its formation to its decision to decline Yahoo’s acquisition offer to its post-IPO stock price slump; every hot new social app, from Twitter to Snapchat to TikTok, is framed as the service that will finally doom Facebook to being the next MySpace.

The truth, though, is that in many respects Facebook is more of a platform than Apple is. In 2018 I wrote about The Bill Gates Line, which was actually coined as criticism of Facebook:

Over the last few weeks I have been exploring what differences there are between platforms and aggregators, and was reminded of this anecdote from Chamath Palihapitiya in an interview with Semil Shah:

Semil Shah: Do you see any similarities from your time at Facebook with Facebook platform and connect, and how Uber may supercharge their platform?

Chamath Palihapitiya: Neither of them are platforms. They’re both kind of like these comical endeavors that do you as an Nth priority. I was in charge of Facebook Platform. We trumpeted it out like it was some hot shit big deal. And I remember when we raised money from Bill Gates, 3 or 4 months after — like our funding history was $5M, $83 M, $500M, and then $15B. When that 15B happened a few months after Facebook Platform and Gates said something along the lines of, “That’s a crock of shit. This isn’t a platform. A platform is when the economic value of everybody that uses it, exceeds the value of the company that creates it. Then it’s a platform.”

By this measure Windows was indeed the ultimate platform — the company used to brag about only capturing a minority of the total value of the Windows ecosystem — and the operating system’s clear successors are Amazon Web Services and Microsoft’s own Azure Cloud Services. In all three cases there are strong and durable businesses to be built on top.

A drawing of Platform Businesses Attract Customers by Third Parties

Once a platform dips under the Bill Gates Line, though, the long-term potential of a business built on a “platform” starts to decline. Apple’s App Store, for example, has all of the trappings of a platform, but Apple quite clearly captures the vast majority of the overall ecosystem, both because of the profitability of the iPhone and also because of its control of App Store economics; the paucity of strong and durable businesses on the App Store is a natural outgrowth of that.

A drawing of Apple's Control of the App Store Ecosystem

Note that Apple’s ability to control the economics of its developers comes from intermediating the relationship of those developers with customers.

What is missing in this story is how exactly all of those developers made money on the App Store. Yes, without question, a big part of it was the iPhone’s explosive growth and how the App Store made it easy and safe to install apps. Another very big part of it, though, was Facebook.

Facebook’s Platform

Facebook’s early stumbles on mobile are well-documented: the company bet on web-based apps that just didn’t work very well; the company completely rewrote its iOS app even as it was going public, which meant it had a stagnating app at the exact time mobile was exploding, threatening the desktop advertising product and platform that were the basis of the company’s S-1.

The re-write turned out to be not just a company-saving move — the native mobile app had the exact same user-facing features as the web-centric one, with the rather important detail that it actually worked — but in fact an industry-transformational one: one of the first new products enabled by the company’s new app were app install ads. From TechCrunch in 2012:

Facebook is making a big bet on the app economy, and wants to be the top source of discovery outside of the app stores. The mobile app install ads let developers buy tiles that promote their apps in the Facebook mobile news feed. When tapped, these instantly open the Apple App Store or Google Play market where users can download apps.

The ads are working already. One client TinyCo saw a 50% higher click through rate and higher conversion rates compared to other install channels. Facebook’s ads also brought in more engaged users. Ads tech startup Nanigans clients attained 8-10X more reach than traditional mobile ad buys when it purchased Facebook mobile app install ads. AdParlor racked up a consistent 1-2% click through rate.

Facebook’s App Install product quickly became the most important channel for acquiring users, particularly for games that monetized with Apple’s in-app purchase API: the combination of Facebook data with developer’s sophisticated understanding of expected value per app install led to an explosion in App Store revenue. And yet, even this was seen as a reason to doubt Facebook; in 2015 I wrote about a prominent venture capitalist’s Facebook skepticism:

Much of the criticism of app install ads rests on obsolete assumptions that view apps as fun baubles instead of the dominant interaction layer between companies and consumers. If you start with the premise that apps are more important than web pages or any other form of interaction when it comes to connecting with consumers, being the dominant channel for app installs seems downright safe.

Surely, though, at least some portion of Facebook’s revenue must come from app-install ads for games, no? Absolutely! But even that is less of a danger than critics think for three reasons:

  • It’s a mistake to assume that just because venture-backed companies have a tendency to be profligate with their money that app install ad spending is little more than “spray-and-pray”. In fact, app install ads are not just direct marketing, which is much easier to track, Facebook app install ads in particular are one of the most data rich ad formats around…
  • That said, were I a venture capitalist like Gurley, I would be gun-shy about mobile gaming; there are a whole host of examples of one-shot wonders that attract funding or even IPO on a hit game only to struggle to recreate their initial success. I think it’s a really hard area to invest in. Facebook, though, doesn’t need to care if a particular gaming company succeeds or fails, because they aren’t exposed to any one gaming company: they have exposure to the industry as a whole. And on that note:
  • Mobile gaming revenue is not a flash-in-the-pan. According to Newzoo, a video game research firm, global mobile game revenues is expected to surpass console revenue this year. Interestingly — and perhaps this makes the space a bit of a blind-spot for U.S.-based observers — console spending will still dominate in North America ($11.1 billion to $7.2 billion); it’s in the rest of the world — particularly in Asia — where mobile is absolutely dominant.

…Ultimately, if there is a bubble, everyone will suffer, including Facebook. But big picture I continue to consider the company the most underrated in the Valley (which is kind of amazing). Facebook has barely scratched the surface of their monetization capabilities, brand advertising has yet to migrate from TV, Instagram still isn’t monetized at all, and to cap it off Facebook usage is still increasing. This is a juggernaut that, if there is a downturn, is more likely to be the exception to industry doldrums than the rule.

While this excerpt is about mobile games, the analysis applies to a whole host of industries that have grown up on Facebook, like direct-to-consumer e-commerce companies:

  • Facebook’s targeting is a particularly potent combination for companies that convert on-line. Indeed, the biggest mistake I’ve made in evaluating the company is over-estimating the potential of brand advertising and under-appreciating just how large the direct response opportunity was.
  • Relatedly, the direct response opportunity is so large because Facebook has created the conditions for new direct response-based companies to be created. For apps, this opportunity was created in conjunction with Apple and Google (Android); for e-commerce this opportunity was created in conjunction with Shopify. What both examples have in common is that Facebook’s advertising was a critical factor in creating new businesses that were unique to the Internet.
  • It’s not just mobile gaming that is more than a flash-in-the-pain: the transformative impact of the Internet is only starting to be felt, which is to say that the long run will be less about traditional companies adopting digital than it will be about their entire way of doing business being rendered obsolete.

One of my favorite examples are CPG companies.

Facebook’s Anti-Fragility

In 2016’s TV Advertising’s Surprising Strength — And Inevitable Fall I observed:

The very institution of television advertising is intertwined with the kinds of advertisers that use it the most, the products they sell, and the way they are bought-and-sold. And what should be terrifying to television executives is that all of those pieces that make television advertising the gold mine that it has been are under the exact same threat that TV watching itself is: the threat of the Internet…

CPG is the perfect example: building a “house of brands” allows a company like Procter & Gamble to target demographic groups even as they leverage scale to invest in R&D, bring down the cost of products, and most importantly, dominate the distribution channel (i.e. retail shelf space). Said retailers, meanwhile, are huge in their own right, not only so they can match their massive suppliers at the bargaining table but also so they can scale logistics, inventory management, store development, etc. Automobile companies, meanwhile, are not unlike CPG companies: they operate a “house of brands” to serve different demographics while benefitting from scale in production and distribution; the primary difference is that they make money through one large purchase instead of over many smaller purchases over time.

Similar principles apply to the other companies on this list: all are looking to reach as many consumers as possible with blunt targeting at best, all benefit from scale, and all are looking to earn significant lifetime value from consumers. And, along those lines, all can afford the expense of TV. In fact, the top 200 advertisers in the U.S. love TV so much that they make up 80% of television advertising, despite accounting for only 51% of total advertising (and 41% of digital).

This is a very different picture from Facebook, where as of Q1 2019 the top 100 advertisers made up less than 20% of the company’s ad revenue; most of the $69.7 billion the company brought in last year came from its long tail of 8 million advertisers.

This focus on the long-tail, which is only possible because of Facebook’s fully automated ad-buying system, has turned out to be a tremendous asset during the coronavirus slow-down. I explained after Facebook’s Q1 2020 earnings:

That first bit gets at the other thing the Wall Street Journal article got wrong: it is not simply that direct response stayed strong while brand advertising declined, but rather that Facebook actually received more direct response advertising because brand advertising declined…

Notice, though, what happens in a situation like the coronavirus crisis, where a segment of advertisers competing for limited inventory stop buying ads: the mobile gaming company doesn’t reduce their budget — to do so would be to kill the company! — but in fact ends up getting more efficient spend. Suddenly the clearing price for the auction to show those app install ads is $0.75 per app install; now the mobile gaming company is getting 26,667 app installs for its $20,000 spend, which results in an expected profit of $6,667.

This does, obviously, entail downside for Facebook — that extra ~$6,000 in profit is out of Facebook’s pocket — but at the same time the loss is capped because not only is the mobile gaming company not reducing its spend, it is in fact incentivized to increase its spend given the reduced competition and thus increased profitability for its ads. And, of course, as that opportunity is seized on by more and more companies, Facebook’s profits, which in the end are gated by the amount of inventory it has, not only return to normal but arguably have more upside, given that usage of the platform is increasing.

This explains why the news about large CPG companies boycotting Facebook is, from a financial perspective, simply not a big deal. Unilever’s $11.8 million in U.S. ad spend, to take one example, is replaced with the same automated efficiency that Facebook’s timeline ensures you never run out of content. Moreover, while Facebook loses some top-line revenue — in an auction-based system, less demand corresponds to lower prices — the companies that are the most likely to take advantage of those lower prices are those that would not exist without Facebook, like the direct-to-consumer companies trying to steal customers from massive conglomerates like Unilever.

In this way Facebook has a degree of anti-fragility that even Google lacks: so much of its business comes from the long tail of Internet-native companies that are built around Facebook from first principles, that any disruption to traditional advertisers — like the coronavirus crisis or the current boycotts — actually serves to strengthen the Facebook ecosystem at the expense of the TV-centric ecosystem of which these CPG companies are a part.

The Apple Vulnerability

Facebook, though, has a vulnerability: Apple. From AdAge:

Apple announced new privacy changes to its upcoming iOS 14 software that will significantly hinder how media buyers and brands target, measure and find consumers. One change will make it harder for apps to track iOS users across different apps and websites. Another will make attribution — determining which tactics contribute to sales or conversions — harder for marketers.

The changes, announced Monday at Apple’s Worldwide Developers Conference, apply to the company’s Identifier for Advertisers (IDFA), which assigns a unique number to a user’s mobile device. Advertisers have access to the feature and use it in areas including ad targeting, building lookalike audiences, attribution and encouraging consumers to download apps.

IDFA is shared with app makers and advertisers by default, but that will change once iOS 14 rolls out this fall. Then, users must give explicit permission through a popup for app publishers to track them across different apps and websites, or to share that information with third parties.

Facebook was the king of the IDFA (and the Google Advertising ID equivalent on Android): it was the linchpin around which its app install business in particular was built. The company could understand when a user spent a certain amount in a game, for example, look for users that were similar, and then display an app install ad for that game, and measure how effective it was. In fact, over the last few years, Facebook has simply asked advertisers to specify what return on ad spend they are hoping to achieve, and Facebook does all of the work of figuring out how many ads to display to which users — the entire process is automated.

This part of the business is going to change a lot. Apple was quite clever in their approach: instead of killing the IDFA, which could be construed as anti-competitive, particularly given Apple’s expanding app install ad business (which is expanding beyond App Store search ads), Apple is simply asking users if they would like to be tracked, and letting them render the IDFA useless. Notably, Facebook has declined to even show app install advertisements to the 30% of U.S. iPhone users that turned off their IDFA of their own accord — and now it is opt-in, instead of opt-out.

Still, I wouldn’t count Facebook out: to the extent the company is hurt, it seems likely that the universe of 3rd-party ad tech companies that lack Facebook’s direct connection with users, both in terms of data collection and ad display, will be in far worse shape, and it is not as if the digital ecosystem — and its associated advertising — is going to disappear. Indeed, much like GDPR, the safe bet is the company with the wherewithal to make lemons out of lemonade. Notably, Apple’s alternative for app install ad campaigns, SKAdNetwork, is so limited that there is likely to be tremendous value in whatever company can create the exact sort of automated campaign creation that Facebook is already offering.

It’s also worth noting that Apple’s crackdown on web cookies has also helped Facebook, as I explained last month; by making it more difficult for 3rd-party payment providers to offer a seamless experience, Apple is opening the door to Facebook taking over payments for direct-to-consumer companies:

Facebook Shops is a perfect example: it is going to succeed because it is good for Shopify’s merchants, but the reason it is good for Shopify’s merchants is because Facebook and Apple effectively teamed up to make it impossible for Shopify to fix the payment problem on their own.

This is what makes the Apple-Facebook dynamic so fascinating: Facebook’s biggest opportunities come from filling in the holes in Apple’s platform proposition, even as Apple seems opposed to Facebook at every turn.

Shared Risk

What is particularly notable is how conflict between the two companies threatens their greatest assets.

Start with Apple: while its battle against cookies and effective obliteration of the IDFA are from one perspective deeply rooted in its focus on users, it is impossible to ignore the company’s focus on Services revenue. Making the web less useful makes apps more useful, from which Apple can take its share; similarly, it is notable that Apple is expanding its own app install product even as it is knee-capping the industry’s. The question is if these attempts to maximize services revenue are in service of the user experience, or Apple’s bottom line; the company should take care to remember that the latter follows the former.

Facebook, meanwhile, already sees promise in taking business from its best partners, as seen in the announcement of Facebook Shops; there may be a similar temptation when it comes to IDFA, given that the IDFV — Identifier for Vendor, which allows a vendor to get the device ID from its own apps — is still available. Might Facebook consider shifting its business model from being an advertising platform for other apps into a WeChat-like publishing model for the most popular games and services?2 The company should also take care: its service of the long tail has not only made it more of a Bill-Gates platform than Apple, but is also the foundation of the company’s strength in crisis.

Regardless, what seems clearer than ever is that it is these two companies, Apple and Facebook, that are driving the industry. That their approaches are so different is in fact why they are the pairing that matters most.

  1. I previously quoted this piece in Beachheads and Obstacles. []
  2. I do expect a lot of consolidation in the mobile gaming industry, particularly amongst hyper-casual game publishers, for exactly this reason []

The End of OS X

On May 6, 2002, Steve Jobs opened WWDC with a funeral for Classic Mac OS:

Yesterday, 18 years later, OS X finally reached its own end of the road: the next version of macOS is not 10.16, but 11.0.

macOS 11.0

There was no funeral.

The OS X Family Tree

OS X has one of the most fascinating family trees in technology; to understand its significance requires understanding each of its forebearers.

The OS X Family Tree

Unix: Unix does refer to a specific operating system that originated in AT&T’s Bell Labs (the copyrights of which are owned by Novell), but thanks to a settlement with the U.S. government (that was widely criticized for going easy on the telecoms giant), Unix was widely-licensed to universities in particular. One of the most popular variants that resulted was the Berkeley Software Distribution (BSD), developed at the University of California, Berkeley.

What all of the variations of Unix had in common was the Unix Philosophy; the Bell System Technical Journal explained in 1978:

A number of maxims have gained currency among the builders and users of the Unix system to explain and promote its characteristic style:

  1. Make each program do one thing well. To do a new job, build afresh rather than complicate old programs by adding new “features”.
  2. Expect the output of every program to become the input to another, as yet unknown, program. Don’t clutter output with extraneous information. Avoid stringently columnar or binary input formats. Don’t insist on interactive input.
  3. Design and build software, even operating systems, to be tried early, ideally within weeks. Don’t hesitate to throw away the clumsy parts and rebuild them.
  4. Use tools in preference to unskilled help to lighten a programming task, even if you have to detour to build the tools and expect to throw some of them out after you’ve finished using them.


The Unix operating system, the C programming language, and the many tools and techniques developed in this environment are finding extensive use within the Bell System and at universities, government laboratories, and other commercial installations. The style of computing encouraged by this environment is influencing a new generation of programmers and system designers. This, perhaps, is the most exciting part of the Unix story, for the increased productivity fostered by a friendly environment and quality tools is essential to meet every-increasing demands for software.

Today you can still run nearly any Unix program on macOS, but particularly with some of the security changes made in Catalina, you are liable to run into permissions issues, particularly when it comes to seamlessly linking programs together.

Mach: Mach was a microkernel developed at Carnegie Mellon University; the concept of a microkernel is to run the smallest amount of software necessary for the core functionality of an operating system in the most privileged mode, and put all other functionality into less privileged modes. OS X doesn’t have a true microkernel — the BSD subsystem runs in the same privileged mode, for performance reasons — but the modular structure of a microkernel-type design makes it easier to port to different processor architectures, or remove operating system functionality that is not needed for different types of devices (there is, of course, lots of other work that goes into a porting a modern operating system; this is a dramatic simplification).

More generally, the spirit of a microkernel — a small centralized piece of software passing messages between different components — is how modern computers, particularly mobile devices, are architected: multiple specialized chips doing discrete tasks under the direction of an operating system organizing it all.

Xerox: The story of Steve Jobs’ visiting Xerox is as mistaken as it is well-known; the Xerox Alto and its groundbreaking mouse-driven graphical user interface was well-known around Silicon Valley, thanks to the thousands of demos the Palo Alto Research Center (PARC) did and the papers it had published. PARC’s problem is that Xerox cared more about making money from copy machines than in figuring out how to bring the Alto to market.

That doesn’t change just how much of an inspiration the Alto was to Jobs in particular: after the visit he pushed the Lisa computer to have a graphical user interface, and it was why he took over the Macintosh project, determined to make an inexpensive computer that was far easier to use than anything that had come before it.

Apple: The Macintosh was not the first Apple computer: that was the Apple I, and then the iconic Apple II. What made the Apple II unique was its explicit focus on consumers, not businesses; interestingly, what made the Apple II successful was VisiCalc, the first spreadsheet application, which is to say that the Apple II sold primarily to businesses. Still, the truth is that Apple has been a consumer company from the very beginning.

This is why the Mac is best thought of as the child of Apple and Xerox: Apple understood consumers and wanted to sell products to them, and Xerox provided the inspiration for what those products should look like.

It was NeXTSTEP, meanwhile, that was the child of Unix and Mach: an extremely modular design, from its own architecture to its focus on object-oriented programming and its inclusion of different “kits” that were easy to fit together to create new programs.

And so we arrive at OS X, the child of the classic Macintosh OS and NeXTSTEP. The best way to think about OS X is that it took the consumer focus and interface paradigms of the Macintosh and layered them on top of NeXTSTEP’s technology. In other words, the Unix side of the family was the defining feature of OS X.

Return of the Mac

In 2005 Paul Graham wrote an essay entitled Return of the Mac explaining why it was that developers were returning to Apple for the first time since the 1980s:

All the best hackers I know are gradually switching to Macs. My friend Robert said his whole research group at MIT recently bought themselves Powerbooks. These guys are not the graphic designers and grandmas who were buying Macs at Apple’s low point in the mid 1990s. They’re about as hardcore OS hackers as you can get.

The reason, of course, is OS X. Powerbooks are beautifully designed and run FreeBSD. What more do you need to know?

Graham argued that hackers were a leading indicator, which is why he advised his dad to buy Apple stock:

If you want to know what ordinary people will be doing with computers in ten years, just walk around the CS department at a good university. Whatever they’re doing, you’ll be doing.

In the matter of “platforms” this tendency is even more pronounced, because novel software originates with great hackers, and they tend to write it first for whatever computer they personally use. And software sells hardware. Many if not most of the initial sales of the Apple II came from people who bought one to run VisiCalc. And why did Bricklin and Frankston write VisiCalc for the Apple II? Because they personally liked it. They could have chosen any machine to make into a star.

If you want to attract hackers to write software that will sell your hardware, you have to make it something that they themselves use. It’s not enough to make it “open.” It has to be open and good. And open and good is what Macs are again, finally.

What is interesting is that Graham’s stock call could not have been more prescient: Apple’s stock closed at $5.15 on March 31, 2005, and $358.87 yesterday;1 the primary driver of that increase, though, was not the Mac, but rather the iPhone.

The iOS Sibling

If one were to add iOS to the family tree I illustrated above, most would put it under Mac OS X; I think, though, iOS is best understood as another child of Classic Mac and NeXT, but this time the resemblance is to the Apple side of the family. Or to put it another way, while the Mac was the perfect machine for “hackers”, to use Graham’s term, the iPhone was one of the purest expressions of Apple’s focus on consumers.

The iPhone, as Steve Jobs declared at its unveiling in 2007, runs OS X, but it was certainly not Mac OS X: it ran the same XNU kernel, and most of the same subsystem (with some new additions to support things like cellular capability), but it had a completely new interface. That interface, notably, did not include a terminal; you could not run arbitrary Unix programs.2 That new interface, though, was far more accessible to regular users.

What is more notable is that the iPhone gave up parts of the Unix Philosophy as well: applications all ran in individual sandboxes, which meant that they could not access the data of other applications or of the operating system. This was great for security, and is the primary reason why iOS doesn’t suffer from malware and apps that drag the entire system into a morass, but one certainly couldn’t “expect the output of every program to become the input to another”; until sharing extensions were added in iOS 8 programs couldn’t share data with each other at all, and even now it is tightly regulated.

At the same time, the App Store made principle one — “make each program do one thing well” — accessible to normal consumers. Whatever possible use case you could imagine for a computer that was always with you, well, “There’s an App for That”:

Consumers didn’t care that these apps couldn’t talk to each other: they were simply happy they existed, and that they could download as many as they wanted without worrying about bad things happening to their phone — or to them. While sandboxing protected the operating system, the fact that every app was reviewed by Apple weeded out apps that didn’t work, or worse, tried to scam end users.

This ended up being good for developers, at least from a business point-of-view: sure, the degree to which the iPhone was locked down grated on many, but Apple’s approach created millions of new customers that never existed for the Mac; the fact it was closed and good was a benefit for everyone.

macOS 11.0

What is striking about macOS 11.0 is the degree to which is feels more like a son of iOS than the sibling that Mac OS X was:

  • macOS 11.0 runs on ARM, just like iOS; in fact the Developer Transition Kit that Apple is making available to developers has the same A12Z chip as the iPad Pro.
  • macOS 11.0 has a user interface overhaul that not only appears to be heavily inspired by iOS, but also seems geared for touch.
  • macOS 11.0 attempts to acquire developers not primarily by being open and good, but by being easy and good enough.

The seeds for this last point were planted last year with Catalyst, which made it easier to port iPad apps to the Mac; with macOS 11.0, at least the version which will run on ARM, Apple isn’t even requiring a recompile: iOS apps will simply run on macOS 11.0, and they will be in the Mac App Store by default (developers can opt-out).

In this way Apple is using their most powerful point of leverage — all of those iPhone consumers, which compel developers to build apps for the iPhone, Apple’s rules notwithstanding — to address what the company perceives as a weakness: the paucity of apps in the Mac App Store.

Is the lack of Mac App Store apps really a weakness, though? When I consider the apps that I use regularly on the Mac, a huge number of them are not available in the Mac App Store, not because the developers are protesting Apple’s 30% cut of sales, but simply because they would not work given the limitations Apple puts on apps in the Mac App Store.

The primary limitation, notably, is the same sandboxing technology that made iOS so trustworthy; that trustworthiness has always come with a cost, which is the ability to build tools that do things that “lighten a task”, to use the words from the Unix Philosophy, even if the means to do so opens the door to more nefarious ends.

Fortunately macOS 11.0 preserves its NeXTSTEP heritage: non-Mac App Store apps are still allowed, for better (new use cases constrained only by imagination and permissions dialogs) and worse (access to other apps and your files). What is notable is that this was even a concern: Apple’s recent moves on iOS, particularly around requiring in-app purchase for SaaS apps, feel like a drift towards Xerox, a company that was so obsessed with making money it ignored that it was giving demos of the future to its competitors; one wondered if the obsession would filter down to the Mac.

For now the answer is no, and that is a reason for optimism: an open platform on top of the tremendous hardware innovation being driven by the iPhone sounds amazing. Moreover, one can argue (hope?) it is a more reliable driver of future growth than squeezing every last penny out of the greenfield created by the iPhone. At a minimum, leaving open the possibility of entirely new things leaves far more future optionality than drawing the strings every more tightly as on iOS. OS X’s legacy lives, for now.

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

  1. Yes, this incorporates Apple’s 7:1 stock split []
  2. Unless you jailbroke your phone []

Apple, ARM, and Intel

Mark Gurman at Bloomberg is reporting that Apple will finally announce that the Mac is transitioning to ARM chips at next week’s Worldwide Developer Conference (WWDC):

Apple Inc. is preparing to announce a shift to its own main processors in Mac computers, replacing chips from Intel Corp., as early as this month at its annual developer conference, according to people familiar with the plans. The company is holding WWDC the week of June 22. Unveiling the initiative, codenamed Kalamata, at the event would give outside developers time to adjust before new Macs roll out in 2021, the people said. Since the hardware transition is still months away, the timing of the announcement could change, they added, while asking not to be identified discussing private plans. The new processors will be based on the same technology used in Apple-designed iPhone and iPad chips. However, future Macs will still run the macOS operating system rather than the iOS software on mobile devices from the company.

I use the word “finally” a bit cheekily: while it feels like this transition has been rumored forever, until a couple of years ago I felt pretty confident it was not going to happen. Oh sure, the logic of Apple using its remarkable iPhone chips in Macs was obvious, even back in 2017 or so:

  • Apple’s A-series chips had been competitive on single-core performance with Intel’s laptop chips for several years.
  • Intel, by integrating design and manufacturing, earned very large profit margins on its chips; Apple could leverage TSMC for manufacturing and keep that margin for itself and its customers.
  • Apple could, as they did with iOS, deeply integrate the operating system and the design of the chip itself to both maximize efficiency and performance and also bring new features and capabilities to market.

The problem, as I saw it, was why bother? Sure, the A-series was catching up on single-thread, but Intel was still far ahead on multi-core performance, and that was before you got to desktop machines where pure performance didn’t need to be tempered by battery life concerns. More importantly, the cost of switching was significant; I wrote in early 2018:

  • First, Apple sold 260 million iOS devices over the last 12 months; that is a lot of devices over which to spread the fixed costs of a custom processor. During the same time period, meanwhile, the company only sold 19 million Macs; that’s a much smaller base over which to spread such an investment.
  • Second, iOS was built on the ARM ISA from the beginning; once Apple began designing its own chips (instead of buying them off the shelf) there was absolutely nothing that changed from a developer perspective. That is not the case on the Mac: many applications would be fine with little more than a recompile, but high-performance applications written at lower levels of abstraction could need considerably more work (this is the challenge with emulation as well: the programs that are the most likely to need the most extensive rewrites are those that are least tolerant of the sort of performance slowdowns inherent in emulation).
  • Third, the PC market is in the midst of its long decline. Is it really worth all of the effort and upheaval to move to a new architecture for a product that is fading in importance? Intel may be expensive and may be slow, but it is surely good enough for a product that represents the past, not the future.

However, the takeaway from the Daily Update where I wrote that was that I was changing my mind: ARM Macs felt inevitable, because of changes at both Apple and Intel.

Apple and Intel

A year before that Daily Update, Apple held a rather remarkable event for five writers where the company seemed to admit it had neglected the Mac; from TechCrunch:

Does Apple care about the Mac anymore?

That question is basically the reason that we’re here in this room. Though Apple says that it was doing its best to address the needs of pro users, it obviously felt that the way the pro community was reacting to its moves (or delays) was trending toward what it feels is a misconception about the future of the Mac.

“The Mac has an important, long future at Apple, that Apple cares deeply about the Mac, we have every intention to keep going and investing in the Mac,” says Schiller in his most focused pitch about whether Apple cares about the Mac any more, especially in the face of the success of the iPhone and iPad.

“And if we’ve had a pause in upgrades and updates on that, we’re sorry for that — what happened with the Mac Pro, and we’re going to come out with something great to replace it. And that’s our intention,” he says, in as clear a mea culpa as I can ever remember from Apple.

Yes, Schiller was talking about the Mac Pro, which is what the event was nominally about, but that wasn’t the only Mac long in the teeth, and the ones that had been updated, particularly the laptops, were years into the butterfly keyboard catastrophe; meanwhile there was a steady-stream of new iPhones and iPads with new industrial designs and those incredible chips.

Those seemingly neglected Macs, meanwhile, were stuck with Intel, and Apple saw the Intel roadmap that has only recently become apparent to the world: it has been a map to nowhere. In 2015 Intel started shipping 14nm processors in volume from fabs in Oregon, Arizona, and Ireland; chip makers usually build fabs once per node size, seeking to amortize the tremendous expense over the entire generation, before building new fabs for new nodes. Three years later, though, Intel had to build more 14nm capacity after hiring Samsung to help it build chips; the problem is that its 10nm chips were delayed by years (the company just started shipping 10nm parts in volume this year).

Meanwhile, TSMC was racing ahead, with 7nm chips in 20171, and 5nm chip production starting this year; this, combined with Apple’s chip design expertise, meant that as of last fall iPhone chips were comparable in speed to the top-of-the-line iMac chips. From Anandtech:

We’ve now included the latest high-end desktop CPUs as well to give context as to where the mobile is at in terms of absolute performance.

Anandtech benchmarks showing the A13 is as fast as a desktop Intel chip

Overall, in terms of performance, the A13 and the Lightning cores are extremely fast. In the mobile space, there’s really no competition as the A13 posts almost double the performance of the next best non-Apple SoC. The difference is a little bit less in the floating-point suite, but again we’re not expecting any proper competition for at least another 2-3 years, and Apple isn’t standing still either.

Last year I’ve noted that the A12 was margins off the best desktop CPU cores. This year, the A13 has essentially matched best that AMD and Intel have to offer – in SPECint2006 at least. In SPECfp2006 the A13 is still roughly 15% behind.

The Intel Core i9-9900K Processor in those charts launched at price of $999 before settling in at a street price of around $520; it remains the top-of-the-line option for the iMac for an upgrade price of $500 above the Intel Core i5-8600K, a chip that launched at $420 and today costs $220. The A13, meanwhile, probably costs between $50~$60.2

This is what made next week’s reported announcement feel inevitable: Apple’s willingness to invest in the Mac seems to have truly turned around in 2017 — not only has the promised Mac Pro launched, but so has an entirely new MacBook line with a redesigned keyboard — even as the cost of sticking with Intel has become not simply about money but also performance.

The Implications of ARM

The most obvious implication of Apple’s shift — again, assuming the reporting is accurate — is that ARM Macs will have superior performance to Intel Macs on both a per-watt basis and a per-dollar basis. That means that the next version of the MacBook Air, for example, could be cheaper even as it has better battery life and far better performance (the i3-1000NG4 Intel processor that is the cheapest option for the MacBook Air is not yet for public sale; it probably costs around $150, with far worse performance than the A13).

What remains to be seen is just how quickly Apple will push ARM into its higher-end computers. Again, the A13 is already competitive with some of Intel’s best desktop chips, and the A13 is tuned for mobile; what sort of performance gains can Apple uncover by building for more generous thermal envelopes? It is not out of the question that Apple, within a year or two, has by far the best performing laptops and desktop computers on the market, just as they do in mobile.

This is where Apple’s tight control of its entire stack can really shine: first, because Apple has always been less concerned with backwards compatibility than Microsoft, it has been able to shepherd its developers into a world where this sort of transition should be easier than it would be on, say, Windows; notably the company has over the last decade deprecated its Carbon API and ended 32-bit support with the current version of macOS. Even the developers that have the furthest to go are well down the road.

Second, because Apple makes its own devices, it can more quickly leverage its ability to design custom chips for macOS. Again, I’m not completely certain the economics justify this — perhaps Apple sticks with one chip family for both iOS and the Mac — but if it is going through the hassle of this change, why not go all the way (notably, one thing Apple does not need to give up is Windows support: Windows has run on ARM for the last decade, and I expect Boot Camp to continue, and for virtualization offerings to be available as well; whether this will be as useful as Intel-based virtualization remains to be seen).

What is the most interesting, and perhaps the most profound, is the potential impact on the server market, which is Intel’s bread-and-butter. Linus Torvalds, the creator and maintainer of Linux, explained why he was skeptical about ARM on the server in 2019:

Some people think that “the cloud” means that the instruction set doesn’t matter. Develop at home, deploy in the cloud. That’s bullshit. If you develop on x86, then you’re going to want to deploy on x86, because you’ll be able to run what you test “at home” (and by “at home” I don’t mean literally in your home, but in your work environment). Which means that you’ll happily pay a bit more for x86 cloud hosting, simply because it matches what you can test on your own local setup, and the errors you get will translate better…

Without a development platform, ARM in the server space is never going to make it. Trying to sell a 64-bit “hyperscaling” model is idiotic, when you don’t have customers and you don’t have workloads because you never sold the small cheap box that got the whole market started in the first place…

The only way that changes is if you end up saying “look, you can deploy more cheaply on an ARM box, and here’s the development box you can do your work on”. Actual hardware for developers is hugely important. I seriously claim that this is why the PC took over, and why everything else died…It’s why x86 won. Do you really think the world has changed radically?

ARM on Mac, particularly for developers, could be a radical change indeed that ends up transforming the server space. On the other hand, the shift to ARM could backfire on Apple: Windows, particularly given the ability to run a full-on Linux environment without virtualization, combined with Microsoft’s developer-first approach, is an extremely attractive alternative that many developers just don’t know about — but they may be very interested in learning more if that is the price of running x86 like their servers do.

Intel’s Failure

What is notable about this unknown — will developer preferences for macOS lead to servers switching to ARM (which remember, is cheaper and likely more power efficient in servers as well), or will the existing x86 installation base drive developers to Windows/Linux — is that the outcome is out of Intel’s control.

What started Intel’s fall from king of the industry to observer of its fate was its momentous 2005 decision to not build chips for the iPhone; then-CEO Paul Otellini told Alexis Madrigal at The Atlantic what happened:3

“We ended up not winning it or passing on it, depending on how you want to view it. And the world would have been a lot different if we’d done it,” Otellini told me in a two-hour conversation during his last month at Intel. “The thing you have to remember is that this was before the iPhone was introduced and no one knew what the iPhone would do…At the end of the day, there was a chip that they were interested in that they wanted to pay a certain price for and not a nickel more and that price was below our forecasted cost. I couldn’t see it. It wasn’t one of these things you can make up on volume. And in hindsight, the forecasted cost was wrong and the volume was 100x what anyone thought.”

What is so disappointing about this excuse is that it runs directly counter to what made Intel great; in 1965, Bob Noyce, then at Fairchild Semiconductor4, shocked the semiconductor world by announcing that Fairchild would price its integrated circuit products at $1, despite the fact it cost Fairchild far more than that to produce them. What Noyce understood is that the integrated circuit market was destined to explode, and that by setting a low price Fairchild would not only accelerate that growth, but also drive down its costs far more quickly than it might have otherwise (chips, remember, are effectively zero marginal cost items; the primary costs are the capital costs of setting up manufacturing lines).

That is the exact logic that Otellini “couldn’t see”, so blinded he was by the seemingly dominant PC paradigm and Intel’s enviable profit margins.5 Worse, those volumes went to manufacturers like TSMC instead, providing the capital for research and development and capital investment that has propelled TSMC into the fabrication lead.

CORRECTION: A source suggested that this sentence was wrong:

What started Intel’s fall from king of the industry to observer of its fate was its momentous 2005 decision to not build chips for the iPhone.

XScale, Intel’s ARM chips, were engineered to be fast, not power-efficient, and Intel wasn’t interested in changing their approach; this is particularly striking given that Intel had just recovered from having made the same mistake with the Pentium 4 generation of its x86 chips. Moreover, the source added, Intel wasn’t interested in doing any sort of customization for Apple: their attitude was take-it-or-leave-it for, again, a chip that wasn’t even optimized correctly. A better sentence would have read:

Intel’s fall from king of the industry to observer of its fate was already in motion by 2005: despite the fact Intel had an ARM license for its XScale business, the company refused to focus on power efficiency and preferred to dictate designs to customers like Apple, contemplating their new iPhone, instead of trying to accommodate them (like TSMC).

What is notable is that doesn’t change the sentiment: the root cause was Intel’s insistence on integrating design and manufacturing, certain that their then-lead in the latter would leave customers no choice but to accept the former, and pay through the nose to boot. It was a view of the world that was, as I wrote, “blinded…by the seemingly dominant PC paradigm and Intel’s enviable profit margins.”

My apologies for the error, but also deep appreciation for the correction.

That is why, last month, it was TSMC that was the target of a federal government-led effort to build a new foundry in the U.S.; I explained in Chips and Geopolitics:

Taiwan, you will note, is just off the coast of China. South Korea, home to Samsung, which also makes the highest end chips, although mostly for its own use, is just as close. The United States, meanwhile, is on the other side of the Pacific Ocean. There are advanced foundries in Oregon, New Mexico, and Arizona, but they are operated by Intel, and Intel makes chips for its own integrated use cases only.

The reason this matters is because chips matter for many use cases outside of PCs and servers — Intel’s focus — which is to say that TSMC matters. Nearly every piece of equipment these days, military or otherwise, has a processor inside. Some of these don’t require particularly high performance, and can be manufactured by fabs built years ago all over the U.S. and across the world; others, though, require the most advanced processes, which means they must be manufactured in Taiwan by TSMC.

This is a big problem if you are a U.S. military planner. Your job is not to figure out if there will ever be a war between the U.S. and China, but to plan for an eventuality you hope never occurs. And in that planning the fact that TSMC’s foundries — and Samsung’s — are within easy reach of Chinese missiles is a major issue.

I think the focus on TSMC was correct, and I am encouraged by TSMC’s decision to build a foundry in Arizona, even if they are moving as slowly as they can on a relatively small design; at the same time, what a damning indictment of Intel. The company has not simply lost its manufacturing lead, and is not simply a helpless observer of a potentially devastating shift in developer mindshare from x86 to ARM, but also when its own country needed to subsidize the building of a foundry for national security reasons Intel wasn’t even a realistic option, and a company from a territory claimed by China was.

To that end, while I am encouraged by and fully support this bill by Congress to appropriate $22.8 billion in aid to semiconductor manufacturers (the amount should be higher), I wonder if it isn’t time for someone to start the next great U.S. chip manufacturing company. No, it doesn’t really make economic sense, but this is an industry where aggressive federal industrial policy can and should make a difference, and it’s hard to accept the idea of taxpayer billions going to a once-great company that has long-since forgotten what made it great. Intel has prioritized profit margins and perceived lower risk for decades, and it is only now that the real risks of caring about finances more than fabrication are becoming apparent, for both Intel and the United States.

  1. Node sizes are not an exact measure; most industry experts consider TSMC’s 7nm node size to be comparable to Intel’s 10nm size []
  2. This number is extremely hard to source; but to the degree I am off it is by the tens of dollars, not hundreds []
  3. I first used this quote in Andy Grove and the iPhone SE []
  4. Noyce and Gordon Moore would form Intel with a large number of Fairchild employees three years later []
  5. Incredibly, Otellini then doubled-down: Intel actually sold the ARM division that Jobs had wanted access to a year later. []

Never-ending Niches

You have almost certainly seen this chart about newspaper advertising revenue since World War II:

The notorious chart of plummeting newspaper revenue

The obvious takeaway is that the Internet killed what had been a profitable and growing business; what is interesting, though, is that circulation numbers tell a somewhat different story:

Newspaper circulation over time

Time and Reach

That image is from Robert Gordon’s book The Rise and Fall of American Growth; one of the more startling facts surrounding this graph is that between 1910 and 1930 the average household purchased 3.1 different newspapers a day. As Gordon notes:

The fastest growth occurred in 1870–1900, by which time newspapers had become firmly established as the main source of information and entertainment for a growing population. Color presses were introduced in the 1890s and were first used to produce color comics and supplements. By the early twentieth century, newspapers had extended their content far beyond the news itself and added “gossip columns, travel and leisure advice, color comics, and sporting results.”

It turned out, though, that the daily deadline inherent to newspapers presented a market opportunity for periodicals. Gordon writes:

The mass-circulation national magazine was a creation of the 1880s and 1890s. Unlike newspapers, for which the circulation area was limited by the need to provide time-sensitive news to a particular metropolitan area, the features contained in magazines could reach readers at a more leisurely pace. Hence magazines were national almost from the beginning in the mid-nineteenth century, and among those with the highest circulations late in the century were McClure’s, Collier’s, the Saturday Evening Post, and the Ladies’ Home Journal.

In other words, the market opportunity was defined by the intersection of time and reach; newspapers needed to be timely, but that limited reach, whereas periodicals, by virtue of being weekly or monthly, could also have much greater reach:

Reach versus timeliness in the analog world

These limitations of time and space affected the nature of content as well. While newspapers were focused on “time-sensitive news”, magazines, in a format pioneered by Henry Luce’s Time magazine focused more on contextualizing and analyzing the news that you probably already knew about because of your daily newspaper.

What drove the post-war decline in newspaper circulation was the television. Gordon writes:

Television news, on the other hand, increasingly gained a quality and credibility that the newsreel lacked. The information came first from a familiar anchor, with footage used for the most part as a substantive complement rather than purely as an eye-catching distraction. Indeed, the familiarity of the network anchors helped television news surpass not only the newsreel, but also the newspaper, as the main source of news…

The effect of TV news went beyond the ability to present a familiar, trusted face to deliver the top stories. Like radio, television news was immediate, but it also wielded the power of the image to evoke strong feelings in the viewer. In addition to coverage of the day’s top stories, television news also developed more in-depth journalistic programs…and cable television delivered CNN as the first twenty-four-hour news station in 1980…

Unsurprisingly, after reaching all-time highs in the postwar years, newspaper circulation per household soon began a gradual but continuous decline, dropping from 1.4 per household in 1949 to 0.8 in 1980 and to less than 0.4 in 2010.

This meant that the graph I created above now looked like this:

TV versus newspapers and magazines in terms of reach and timeliness

A daily cadence in a world of CNN was simply the modern version of a weekly cadence for magazines in a world of daily newspapers; what was particularly challenging for newspapers, though, is that TV had further reach as well.

That led the most forward-thinking U.S. newspapers to not just shift towards analysis like magazines had once done, but to also push for more reach of their own, none moreso than the New York Times; while the company first formulated its national strategy in 1998, the best articulation of its plan came in its 2003 annual report:

As we have mentioned in our previous annual letters, our long-term strategy is to operate the leading news and advertising media in each of the markets in which we compete – both nationally and locally. The centerpiece of this strategy is extending the reach of The New York Times’s high-quality journalism into homes and businesses in every city, town, village and hamlet of this country.

Then came the Internet, which accomplished exactly that.

Evolution Versus Revolution

In yesterday’s Daily Update I described how Jeffrey Katzenberg, the founder of Quibi, mistakenly assumed that mobile was simply the next step in the evolution from motion pictures to television, each of which created new possibilities for, in Katzenberg’s words, “the creativity of storytellers [to use] these tools in ways that their inventors had never imagined to amaze audiences.”

The problem is that mobile was completely different from movies and TV, not because of its form factor, but because of the Internet:

The single most important fact about both movies and television is that they were defined by scarcity: there were only so many movies that would ever be made to fill only so many theater slots, and in the case of TV, there were only 24 hours in a day. That meant that there was significant value in being someone who could figure out what was going to be a hit before it was ever created, and then investing to make it so. That sort of selection and production is what Katzenberg and the rest of Hollywood have been doing for decades, and it’s understandable that Katzenberg thought he could apply the same formula to mobile.

Mobile, though, is defined by the Internet, which is to say it is defined by abundance…The goal is not to pick out the hits, but rather to attract as much content as possible, and then algorithmically boost whatever turns out to be good.

This point cannot be emphasized enough: the Internet is the single most disruptive1 force of our lifetimes because it does not evolve existing ways of doing things, but completely smashes the assumptions underlying them — assumptions we often didn’t even realize existed.

So it was with the Internet and the trade-off between reach and time: suddenly every single media entity on earth, no matter how large or small, and no matter its medium of choice, could reach anyone instantly. To put it another way, reach went to infinity, and time went to zero:

The Internet effect on time and reach

This is, of course, an impossible graph, because zero and infinity cannot be illustrated with axis in two-dimensional space; this is probably a better representation of how time and reach collapsed in on themselves:

The first image of a black hole

That is the first image of a black hole, and it is certainly an apt metaphor for the Internet: its effect on media assumptions is incalculable and inescapable.

Competing in an Aggregator World

One of the first Stratechery articles about this shift from scarcity to abundance and its impact on media was from 2014 in an article entitled Economic Power in the Age of Abundance.

One of the great paradoxes for newspapers today is that their financial prospects are inversely correlated to their addressable market. Even as advertising revenues have fallen off a cliff – adjusted for inflation, ad revenues are at the same level as the 1950s – newspapers are able to reach audiences not just in their hometowns but literally all over the world.

A drawing of The Internet has Created Unlimited Reach
Before the Internet, a newspaper like the New York Times was limited in reach; now it can reach anyone on the planet

The problem for publishers, though, is that the free distribution provided by the Internet is not an exclusive. It’s available to every other newspaper as well. Moreover, it’s also available to publishers of any type, even bloggers like myself.

A city view of Stratechery's readers in 2014
The city-by-city view of Stratechery’s readers over the last 30 days.

To be clear, this is absolutely a boon, particularly for readers, but also for any writer looking to have a broad impact. For your typical newspaper, though, the competitive environment is diametrically opposed to what they are used to: instead of there being a scarce amount of published material, there is an overwhelming abundance. More importantly, this shift in the competitive environment has fundamentally changed just who has economic power.2

What followed was probably my first clear articulation of Aggregation Theory, albeit without the name. The point about effectively infinite competition, though, is a critical one. Neither reach nor timeliness were differentiators, but rather commodities; the companies that dominated on the Internet were those — Google and Facebook in particular — that made sense of the abundance that resulted.

That meant there were three strategies available to media companies looking to survive on the Internet. First, cater to Google. This meant a heavy emphasis on both speed and SEO, and an investment in anticipating and creating content to answer consumer questions. Or you could cater to Facebook, which meant a heavy emphasis on click-bait and human interest stories that had the potential of going viral. Both approaches, though, favored media entities with the best cost structures, not the best content, a particularly difficult road to travel given the massive amounts of content on the Internet created for free.

That left a single alternative: going around Google and Facebook and directly to users.

Niches and the New York Times

That raises the question as to what are the vectors on which “destination sites” — those that attract users directly, independent of the Aggregators — compete? The obvious two candidates are focus and quality:

Focus and quality as the determinants of success on the Internet

What is important to note, though, is that while quality is relatively binary, the number of ways to be focused — that is, the number of niches in the world — are effectively infinite; success, in other words, is about delivering superior quality in your niche — the former is defined by the latter.

Every niche competes on its own terms

This obviously isn’t a new concept to Stratechery readers — this is the entire strategic rationale of this site. Again, though, the fact that this is a one-person blog doesn’t mean that my competitive situation is any different than that of the New York Times or any other media entity on the Internet. In other words, to the extent that the New York Times has been successful online — and the company has been very successful indeed! — it follows that the company is well-placed in terms of both focus and quality, and in that order.

In this view, the fact that deeply reported articles about Chinese disinformation on Twitter are held as being low quality by the Chinese government is immaterial; what matters is that the New York Times‘ audience, which is mostly in the United States, finds it of high quality (I certainly do).

That’s an easy example, but there are ones that hit closer to home; for example, I thought this 2018 story that claimed that Facebook Gave Data Access to Chinese Firm Flagged by U.S. Intelligence was, as I wrote at the time, “deeply flawed at best, and willfully mendacious at worst.” It turns out, though, that I am not particularly interested in the “Everything tech does is bad” niche;3 that story was very high quality for much of the New York Times‘s audience.

I don’t bring up this example to complain — quite the contrary! As I wrote in a piece called In Defense of the New York Times, after the company wrote an exposé about Amazon’s working conditions:

The fact of the matter is that the New York Times almost certainly got various details of the Amazon story wrong. The mistake most critics made, though, was in assuming that any publication ever got everything completely correct. Baquet’s insistence that good journalism starts a debate may seem like a cop-out, but it’s actually a far healthier approach than the old assumption that any one publication or writer or editor was ever in a position to know “All the News That’s Fit to Print.”

I’d go further: I think we as a society are in a far stronger place when it comes to knowing the truth than we have ever been previously, and that is thanks to the Internet…the New York Times doesn’t have the truth, but then again, neither do I, and neither does Amazon. Amazon, though, along with the other platforms that, as described by Aggregation Theory, are increasingly coming to dominate the consumer experience, are increasingly powerful, even more powerful than governments. It is a great relief that the same Internet that makes said companies so powerful is architected such that challenges to that power can never be fully repressed, and I for one hope that the New York Times realizes its goal of actually making sustainable revenue in the process of doing said challenging.

Indeed they have, and I see the ongoing criticism of tech as a feature, not a bug.

Connections and Transformations

There is, in this long-winded explanation, a connection to recent events.

First, that hopeful note about the Internet bringing us closer to the truth by virtue of increasing the amount of information is quite obviously correct. The light revealing the dust in the air in terms of the African American experience is coming not from traditional publications, but from the fact that everyone is now a publisher; it turns out the black hole analogy applies not only to analog business models, but also to how the media covered what is clearly not a new problem.

Second, given the nichification of everything, whether by subject matter or sensibility, I am not surprised that the New York Times is finding it difficult to sustain an opinion section purporting to represent all sides of an issue. This isn’t the pre-Internet era, when only a few publications had the reach to plausibly claim they had a duty to show both sides, and more importantly, when that reach defined their competitive advantage. Today all opinions from all people are available everywhere, and the New York Times‘s ultimate responsibility is to its audience and its reporters.

Third, this discussion explains why Facebook’s calculation should be different: Facebook (and Google) are not participating in the competition of ideas/attention/monetization, they are defining the terms of that competition. Instead of insisting either company leverage their power explicitly — particularly in terms of politicians that have electoral accountability — more attention should be paid to the fact that that power is completely unaccountable in the first place, and applied in so many ways we cannot see.

What is more worrying is the question of what, if anything, will be connective tissue for society going forward. Infinite niches on as neutral a set of platforms as we can manage makes sense, but by what means do we ensure that people do not disappear into those niches, even if only to decide on how we wish the underlying platforms to be regulated?

Perhaps over time it is geography that will follow business model, instead of the other way around; the shift towards work-from-home is a fascinating development in this regard. What does seem certain is that the past is less of a guide to the future than a reminder that the transformative impact of the Internet is only starting to be felt.

  1. In the small ‘d’ sense, not necessarily — although often! — the Christensen sense []
  2. The biggest change in the city view today, beyond the relative numbers for the circles, is a far heavier representation in India and a fairly lighter representation in China []
  3. I’ve been pretty consistently in the tech is an amoral force camp, criticizing both those that see only evil and those that see only good []