Regulators and Reality

It is coming up on two weeks since the FTC refiled its case against Facebook;1 from the Wall Street Journal:

The Federal Trade Commission filed a new version of its antitrust lawsuit against Facebook Inc. on Thursday, seeking to jump-start its case with bolstered allegations that the company is abusing a monopoly position in social media…The FTC’s amended complaint comes after a federal judge in June dismissed the agency’s original lawsuit, saying it didn’t make sufficient allegations to support claims that Facebook engaged in unlawful monopolization.

With its new, 80-page lawsuit, the FTC seeks to tell a longer, more detailed story about why it believes Facebook is a dominant force that uses its power to hobble any rival that might threaten its market position.

As a quick refresher, the original lawsuit was filed last December and, as I noted at the time, completely failed to characterize Facebook as a monopoly. U.S. District Judge James Boasberg agreed; from his opinion dismissing the case:

Although the Court does not agree with all of Facebook’s contentions here, it ultimately concurs that the agency’s Complaint is legally insufficient and must therefore be dismissed. The FTC has failed to plead enough facts to plausibly establish a necessary element of all of its Section 2 claims — namely, that Facebook has monopoly power in the market for Personal Social Networking (PSN) Services. The Complaint contains nothing on that score save the naked allegation that the company has had and still has a “dominant share of th[at] market (in excess of 60%).” Such an unsupported assertion might (barely) suffice in a Section 2 case involving a more traditional goods market, in which the Court could reasonably infer that market share was measured by revenue, units sold, or some other typical metric. But this case involves no ordinary or intuitive market. Rather, PSN services are free to use, and the exact metes and bounds of what even constitutes a PSN service — i.e., which features of a company’s mobile app or website are included in that definition and which are excluded — are hardly crystal clear. In this unusual context, the FTC’s inability to offer any indication of the metric(s) or method(s) it used to calculate Facebook’s market share renders its vague “60%-plus” assertion too speculative and conclusory to go forward. Because this defect could conceivably be overcome by re-pleading, however, the Court will dismiss only the Complaint, not the case, and will do so without prejudice to allow Plaintiff to file an amended Complaint.

As I noted in June, the FTC’s problem was not laziness, but that Facebook doesn’t have a monopoly; given that, you won’t be surprised to learn that I don’t find the FTC’s new case compelling.

The FTC’s Case

Here is the FTC’s new attempt to define Facebook’s market of “personal social networking services” (all quotes are from the amended complaint):

Personal social networking services consist of online services that enable and are used by people to maintain personal relationships and share experiences with friends, family, and other personal connections in a shared social space. Personal social networking services are a unique and distinct type of online service. Three key elements distinguish personal social networking services from other forms of online services provided to users.

First, personal social networking services are built on a social graph that maps the connections between users and their friends, family, and other personal connections…

Second, personal social networking services include features that many users regularly employ to interact with personal connections and share their personal experiences in a shared social space, including in a one-to-many “broadcast” format…

Third, personal social networking services include features that allow users to find and connect with other users, to make it easier for each user to build and expand their set of personal connections. The social graph also supports this feature by informing which connections are suggested or available to users. Within the United States, the most widely used personal social networking services are Facebook Blue, Instagram, and Snapchat.

The next several paragraphs attempt to explain why these are the only three apps in the space:

Personal social networking is distinct from, and not reasonably interchangeable with, mobile messaging services. Mobile messaging services do not feature a shared social space in which users can interact, and do not rely upon a social graph that supports users in making connections and sharing experiences with friends and family…

Personal social networking is distinct from, and not reasonably interchangeable with, specialized social networking services that are designed for, and are utilized by users primarily for, sharing a narrow and highly specialized category of content with a narrow and highly specialized set of users for a narrow and distinct set of purposes…

Personal social networking is distinct from, and not reasonably interchangeable with, online services that focus on the broadcast or discovery of content based on users’ interests rather than their personal connections. Prominent examples are Twitter, Reddit, and Pinterest…

Personal social networking is distinct from, and not reasonably interchangeable with, online services focused on video or audio consumption such as YouTube, Spotify, Netflix, and Hulu. Users employ such services primarily for the passive consumption of specific media content (e.g., videos or music) from and to a wide audience of typically unknown users…

TikTok is a prominent example of a content broadcasting and consumption service that is not an acceptable substitute for personal social networking services. TikTok users primarily view, create, and share video content to an audience that the poster does not personally know, rather than connect and personally engage with friends and family. The purpose for which users employ TikTok, and the predominant form of interaction on the platform, is not driven by users’ desire to interact with networks of friends and family.

There are two major problems with this argument: the FTC’s own definitions, reasonably understood, don’t reflect reality, and second, the definitions themselves have no relation to the actual market for online services.

Start with the parameters laid out by the FTC:

  • First, WhatsApp is a mobile messaging service. So how is Facebook acquiring it illegal? The FTC’s suit attempts to make the case that Facebook was worried that WhatsApp would evolve into a competitor had Facebook not purchased it, but then why doesn’t that concern apply to every other mobile messaging service? It is the height of motivated reasoning to spin the WhatsApp acquisition as anticompetitive while simultaneously excluding the entire category in which WhatsApp resides.
  • Second, arguing that Facebook is unique from every other social network other than Instagram and Snapchat completely ignores what the product actually does. Apparently the fact that LinkedIn lets you feature your resume (as does Facebook, by the way) means the fact that it is explicitly focused on maintaining and facilitating communications and connections doesn’t matter, despite the fact anything you can do on Facebook can be done on LinkedIn.
  • Third, while it is nice that the FTC bothered to include TikTok in their complaint — the December complaint didn’t mention the app once — any definition that says that Instagram is like Facebook but is not like TikTok is ridiculous. Both let you connect with people you know, but both are primarily focused on broadcast-follow dynamics, not interpersonal communication. This distinction, in conjunction with the previous one, is again motivated reasoning: Facebook is much more like LinkedIn, and Instagram is much more like TikTok, but that’s a problem for the FTC because it ruins their case.

The far bigger problem, though, is that everything I just wrote is meaningless, because everything listed above is a non-rivalrous digital service with zero marginal costs and zero transactional costs; users can and do use all of them at the same time. Indeed, the fact that all of these services can and do exist for the same users at the same time makes the case that Facebook’s market is in fact phenomenally competitive.

What, though, is Facebook competing for? Competition implies rivalry, that is, some asset that can only be consumed by one service to the exclusion of others, and the only rivalrous good in digital services is consumer time and attention. Users only have one set of eyes, and only 24 hours in a day, and every second spent with one service is a second not spent with another (although this isn’t technically true, since you could, say, listen to one while watching another while scrolling a third while responding to notifications from a fourth, fifth, and sixth). Note the percentages in this chart of platform usage:

Most American adults use multiple online services

The total is not 100, it is 372, because none of these services exclude usage of any of the others. And while Facebook is obviously doing well in terms of total users, TikTok in particular looms quite large when it comes to time, the only metric that matters:

Users spend more time on TikTok than other social media platforms

This, of course, is why all of these services, including Instagram, Snapchat, and YouTube are trying to mimic TikTok as quickly as possible, which, last time I checked, is a competitive response, not a monopolistic one. You can even grant the argument that Facebook tried to corner the social media market — whatever that is — a decade ago, but you have to also admit that here in 2021 it is clear that they failed. Competition is the surest sign that there was not actually any anticompetitive conduct, and I don’t think it the FTC’s job to hold Facebook management accountable for failing to achieve their alleged goals.

Prices and Politics

Judge Boasberg, in his opinion dismissing the original FTC case, hinted at what seemed to be the FTC’s political motivations:

The Court’s decision here does not rest on some pleading technicality or arcane feature of antitrust law. Rather, the existence of market power is at the heart of any monopolization claim. As the Supreme Court explained in Twombly, itself an antitrust case, “[A] district court must retain the power to insist upon some specificity in pleading before allowing a potentially massive factual controversy to proceed.” Here, this Court must exercise that power. The FTC’s Complaint says almost nothing concrete on the key question of how much power Facebook actually had, and still has, in a properly defined antitrust product market. It is almost as if the agency expects the Court to simply nod to the conventional wisdom that Facebook is a monopolist. After all, no one who hears the title of the 2010 film “The Social Network” wonders which company it is about. Yet, whatever it may mean to the public, “monopoly power” is a term of art under federal law with a precise economic meaning: the power to profitably raise prices or exclude competition in a properly defined market.

Facebook clearly can’t exclude competitors, and, it should be noted, doesn’t even have the means to raise prices; the FTC, frustratingly enough, doesn’t appear to understand how Facebook’s digital ad market works. Eric Seufert wrote in an article entitled Dear FTC, repeat after me: ad platforms don’t set prices:

Multiple times throughout the complaint, the FTC declares that Facebook’s monopoly control over the market for personal social networking resulted in unnaturally high “advertising prices.” This is simply incorrect, and it reveals a lack of understanding of the digital advertising ecosystem and how advertising inventory is priced…

Digital advertising inventory on large platforms like Facebook is sold through an auction: advertisers bid for impressions, the highest bidder wins, and, depending on the auction design used, either the second-highest (in some flavor of a second-price auction, such as the Vickrey-Clarke-Groves auction design that Facebook employs) or the highest (in a first-price auction) bid sets the price for the placement. Most modern, sophisticated ad platforms allow advertisers to bid against conversions — purchases, registrations, etc. — versus simply bidding for an impression, and the ad platforms use campaign performance to throttle delivery based on calculated click and conversion probabilities for any given user…

The price that an advertiser bids on inventory is wholly dependent on the value of conversions that are produced by that platform. And the degree to which advertisers win auctions is dependent on the competition for that inventory. There is no reason to believe that any advertiser would be paying less for advertising inventory on the Facebook Blue app (or website) today if Facebook had not acquired Instagram or WhatsApp, or if any number of competitive products (but not TikTok!) had entered the very-specifically-defined market in which the FTC believes Facebook operates.

This is why Judge Boasberg’s line that “it is almost as if the agency expects the Court to simply nod to the conventional wisdom that Facebook is a monopolist” stings: Facebook is obviously not particularly popular in Washington D.C., but that is a wholly distinct matter from it being a monopolist. If the powers that be decide that the company needs new kinds of regulation, the answer should be new laws, not redefining antitrust to be about the specific implementation of a non-rivalrous digital service, destroying the credibility of the FTC as a regulator along the way.

Government and Private Industry

That noted, I have to be honest: the prospect of new laws makes me increasingly nervous as well. I absolutely get the case that these platforms are powerful in a way that is deeply suspicious to Americans, and understand the impetus for new regulation, but for me the last two years have been an eye-opening experience about capacity and capability. We have witnessed the federal government, under two different administrations, fumble its way through a pandemic, while its supposedly most capable branch oversaw a disastrous withdrawl from a 20-year nation-building effort that collapsed in a matter of days. The tech industry, meanwhile, has kept the entire world economy running remote with hardly a hiccup, even as other private companies conceived of, tested, and distributed over a billion vaccines and counting. Are we sure we want the former dictating how the latter run their businesses?

China, meanwhile, is going in the opposite direction, taking seats on the board’s of the country’s most innovative companies, driving out founders and killing IPOs, and even limiting when kids can play video games. The most favorable reading of China’s actions is that at least its state has demonstrated the capacity for action — witness how China has brought COVID under control within its borders — but that comes with a level of interference with fundamental freedoms that Americans will never tolerate, and still unanswered questions about just where innovation will come from when pleasing the government is every company’s top priority.

The appropriate response to this challenge — and China is absolutely a challenge — is to reject a top-down approach conducted via regulators with less capacity and greater encumbrances than Beijing, and instead let the tech industry and private companies generally continue to do what they do best: compete. This administration’s antitrust crusaders, unfortunately, don’t really get how markets work. This snippet from The Ezra Klein Show with Tim Wu, a National Economic Council member in charge of technology and competition policy, has stuck with me ever since I heard it in 2016; this was Wu’s takeaway from working in Silicon Valley for a silicon valley startup guilty of accounting fraud:

It kind of changed my thinking about the market and private industry. This was the height of the 90s, government doesn’t have the answers, trust the market, the era of government is over, and I worked in government. The Supreme Court wasn’t perfect, it was relatively public-minded, I don’t think the justices were on the take or anything like that, then I went to private industry, and you know, this was maybe a bad sample — it was WorldCom/Enron era — but these guys didn’t seem to possess any particular wisdom or any special insight into their industry even, they just were all about convincing people to buy a stock, move it up, and then dump it. It really changed my thinking. I actually think I changed my politics, both at the Supreme Court and in Silicon Valley, to become much more suspicious of private actors.

That certainly is about as bad a sample as you can get — I can see why Wu was disillusioned — but here’s the thing: Riverstone Networks, the startup he worked for, ended up in bankruptcy and no longer exists. That is the beauty of the private market — not that everyone is somehow smarter than government, but that there is actual accountability for failure. It’s why Silicon Valley celebrates startups, even though most fail, or are acquired: the best way to innovate is not through top down dictates, but more rolls of the dice.

Lessons Learned

This isn’t my first article about the FTC and tech; back in February 2020, when the FTC requested data from the big five tech companies and their history of acquisitions, I wrote First, Do No Harm; my argument then was that while it would have been better had Facebook not acquired Instagram, thanks to the company’s dominance, regulators risked over-reacting and upsetting a Silicon Valley ecosystem that was driving the U.S. economy.

Two years later, and I have to update my position: in a perfect world with perfect regulators I still think the Instagram acquisition shouldn’t have happened, but you can no longer plausibly argue that Facebook has any sort of monopoly power; look no further than recent tech earnings, where the prevailing story was how company after advertising-supported company was absolutely crushing it, in stark contrast to six years ago when Facebook really did look unstoppable. The market worked.

And, over that same post-February 2020 time period, we have been reminded regulators are not perfect, not even close, even as the tech industry has proven itself to be an even more important and capable asset than ever. Sure it may be a 90s cliché to argue “government doesn’t have the answers, trust the market”, but at some point the reality of the government we have, the competition we face, and the assets we can unleash, has to matter more than holding onto politics for politics’ sake.


  1. I was on vacation 🤷‍♂️ 

Apple’s Mistake

It was in August 2009, two months after the release of the iPhone 3GS, that the barbarians crashed the gates; from The Online Photographer:

The leading photo sharing site, flickr.com, charts the popularity of the cameras used by its membership. Recently the Apple iPhone has jumped into a virtual tie for first place with the Canon XTi. Furthermore, flickr states on its “Camera Finder” page that it can only detect the camera used about 2/3rds of the time, and that, therefore, cameraphones are under-represented on the graphs. Yikes.

When the iPhone became the most popular camera on Flickr

The iPhone would go on to not only be the number one camera on Flickr, but in a far more compelling measure of its impact, create the conditions for Instagram, the photo-sharing network that eclipsed Flickr like Google once eclipsed Yahoo (Yahoo, of course, owned Flickr). Instagram itself was soon acquired by Facebook, which itself had benefited tremendously from the iPhone camera; having a good and ever-improving camera with you everywhere, paired with constant connectivity, transformed photos from memorials for special occasions to, in the words of Snap CEO Evan Spiegel, “part of the communication fabric of our daily lives.”

How is it, then, that a company like Facebook, which is mostly used on mobile — i.e. Android or iOS — made 20.3 million reports of Child Sexual Abuse Material (CSAM) in 2020, while Apple made only 265?1 After all, there are almost certainly more photos on smartphones than there are on social networks — the former is in large part a superset of the latter.

18 USC § 2258A

U.S. Code Title 18 Part 1 Chapter 110 Section 2258A lays out how companies must handle CSAM (complete text here):

(a)Duty To Report.—

(1)In general.—

(A) Duty.—In order to reduce the proliferation of online child sexual exploitation and to prevent the online sexual exploitation of children, a provider—

(i) shall, as soon as reasonably possible after obtaining actual knowledge of any [CSAM], take the actions described in subparagraph (B); and
(ii) may, after obtaining actual knowledge of any facts or circumstances [suggesting imminent child abuse], take the actions described in subparagraph (B).

(B)I Actions described.—The actions described in this subparagraph are—

(i) providing to the CyberTipline of NCMEC [National Center for Missing & Exploited Children], or any successor to the CyberTipline operated by NCMEC, the mailing address, telephone number, facsimile number, electronic mailing address of, and individual point of contact for, such provider; and
(ii) making a report of such facts or circumstances to the CyberTipline, or any successor to the CyberTipline operated by NCMEC.

There is no escaping this responsibility when and if CSAM is discovered:

(e)Failure To Report.—A provider that knowingly and willfully fails to make a report required under subsection (a)(1) shall be fined—

(1) in the case of an initial knowing and willful failure to make a report, not more than $150,000; and
(2) in the case of any second or subsequent knowing and willful failure to make a report, not more than $300,000.

What is not required is that companies actively seek out CSAM on their services:

(f)Protection of Privacy.—Nothing in this section shall be construed to require a provider to—

(1) monitor any user, subscriber, or customer of that provider;
(2) monitor the content of any communication of any person described in paragraph (1); or
(3) affirmatively search, screen, or scan for facts or circumstances described in sections (a) and (b).

These two provisions get at why Facebook and Apple’s reported numbers have historically been so different: it’s not because there is somehow more CSAM on Facebook than exists on Apple devices, but rather that Facebook is scanning all of the images sent to and over its service, while Apple is not looking at what is in your phone, or on their cloud. From there the numbers make much more sense: Facebook is reporting what it finds, while Apple is, as the title of Section (3) suggests, protecting privacy and simply not looking at images at all.

Apple Protects Children

Last week Apple put up a special page on their website entitled Expanded Protections for Children:

At Apple, our goal is to create technology that empowers people and enriches their lives — while helping them stay safe. We want to help protect children from predators who use communication tools to recruit and exploit them, and limit the spread of Child Sexual Abuse Material (CSAM).

Apple is introducing new child safety features in three areas, developed in collaboration with child safety experts. First, new communication tools will enable parents to play a more informed role in helping their children navigate communication online. The Messages app will use on-device machine learning to warn about sensitive content, while keeping private communications unreadable by Apple.

Next, iOS and iPadOS will use new applications of cryptography to help limit the spread of CSAM online, while designing for user privacy. CSAM detection will help Apple provide valuable information to law enforcement on collections of CSAM in iCloud Photos.

Finally, updates to Siri and Search provide parents and children expanded information and help if they encounter unsafe situations. Siri and Search will also intervene when users try to search for CSAM-related topics.

John Gruber at Daring Fireball has a good overview of what are in fact three very different initiatives; what unites, them, though, and continues to differentiate Apple’s approach from Facebook’s, is that Apple is scanning content on your device, while Facebook is doing it in the cloud. Apple emphasized repeatedly that this ensured that Apple does not get access to your content. From the “Communications Safety in Messages” section:

Messages uses on-device machine learning to analyze image attachments and determine if a photo is sexually explicit. The feature is designed so that Apple does not get access to the messages.

From the “CSAM Detection” section:

Apple’s method of detecting known CSAM is designed with user privacy in mind. Instead of scanning images in the cloud, the system performs on-device matching using a database of known CSAM image hashes provided by NCMEC and other child safety organizations…This innovative new technology allows Apple to provide valuable and actionable information to NCMEC and law enforcement regarding the proliferation of known CSAM. And it does so while providing significant privacy benefits over existing techniques since Apple only learns about users’ photos if they have a collection of known CSAM in their iCloud Photos account. Even in these cases, Apple only learns about images that match known CSAM.

There are three ways to think about Apple’s approach, both in isolation and relative to a service like Facebook:2 the idealized outcome, the worst case outcome, and the likely driver.

Capability Versus Policy

Apple’s idealized outcome solves a lot of seemingly intractable problems. On one hand, CSAM is horrific and Apple hasn’t been doing anything about it; on the other hand, the company has a longstanding commitment to ever increasing amounts of encryption, ideally end-to-end. Apple’s system, if it works precisely as designed, preserves both goals: the company can not only keep end-to-end encryption in Messages, but also add it to iCloud Photos (which is not currently encrypted end-to-end), secure in the knowledge that it is doing its part to not only report CSAM but also help parents look after their children. And, from a business perspective, it means that Apple can continue to not make the massive investments that companies like Facebook have in trust-and-safety teams; the algorithm will take care of it.

That, of course, is the rub: Apple controls the algorithm, both in terms of what it looks for and what bugs it may or may not have, as well as the input, which in the case of CSAM scanning is the database from NCMEC. Apple has certainly worked hard to be a company that users trust, but we already know that that trust doesn’t extend everywhere: Apple has, under Chinese government pressure, put Chinese user iCloud data on state-owned enterprise servers, along with the encryption keys necessary to access it. What happens when China announces its version of the NCMEC, which not only includes the horrific imagery Apple’s system is meant to capture, but also images and memes the government deems illegal?

The fundamental issue — and the first reason why I think Apple made a mistake here — is that there is a meaningful difference between capability and policy. One of the most powerful arguments in Apple’s favor in the 2016 San Bernardino case is that the company didn’t even have the means to break into the iPhone in question, and that to build the capability would open the company up to a multitude of requests that were far less pressing in nature, and weaken the company’s ability to stand up to foreign governments. In this case, though, Apple is building the capability, and the only thing holding the company back is policy.

Then again, Apple’s policy isn’t the only one that matters: both the UK and the EU are moving forward on bills that mandate online service companies proactively look for and report CSAM. Indeed, I wouldn’t be surprised if this were the most important factor behind Apple’s move: the company doesn’t want to give up on end-to-end encryption — and likely wants to expand it — which leaves on-device scanning as the only way to satisfy governments not (just) in China but also the West.

Cloud Versus Device

I think that there is another solution to Apple’s conundrum; what is frustrating from my perspective is that I think the company is already mostly there. Consider the status quo: back in 2020 Reuters reported that Apple decided to not encrypt iCloud backups at the FBI’s request:

Apple Inc. dropped plans to let iPhone users fully encrypt backups of their devices in the company’s iCloud service after the FBI complained that the move would harm investigations, six sources familiar with the matter told Reuters. The tech giant’s reversal, about two years ago, has not previously been reported. It shows how much Apple has been willing to help U.S. law enforcement and intelligence agencies, despite taking a harder line in high-profile legal disputes with the government and casting itself as a defender of its customers’ information.

This has a number of significant implications for Apple’s security claims, and is why earlier this year I ranked iMessage as being less secure than Signal, WhatsApp, Telegram, and Facebook Messenger:

iMessage encrypts messages end-to-end by default; however, if you have iCloud backup turned on, your messages can be accessed by Apple (who has the keys for iCloud backups) and, by extension, law enforcement with a warrant. Unlike WhatsApp, though, this is both on by default and cannot be turned off on a granular basis.

This caveat applies to almost everything on your iPhone: if you give in to the never-ending prompts to sign-in to iCloud and its on-by-default backup solution, your data is accessible to Apple and, by extension, law enforcement with a warrant. I actually think this is reasonable! I wrote this when that Reuters report came out:

Go back to what I said above: determined actors will have access to encryption and facial recognition. Anyone trying to argue whether or not these technologies should exist is not living in reality. It follows then, that we should take care to ensure that good actors have access to these technologies too. That means not making them illegal.

Second, though, legitimate societal concerns about the needs of law enforcement and the radicalizing nature of the Internet should be taken seriously. That means we should think very carefully about making encryption the default…This also splits the difference when it comes to principles: users have agency — they can ensure that everything they do is encrypted — while total privacy is available but not given by default.

I actually think that Apple does an excellent job of striking that balance today. When it comes to the iPhone itself, Apple is the only entity that can make it truly secure; no individual can build their own secure enclave that sits at the root of iPhone security. Therefore, they are right to do so: everyone has access to encryption.

From there it is possible to build a fully secure environment: use only encrypted communications, use encrypted backups to a computer secured by its own hardware-based authentication scheme, etc. Taking the slightly easier route, though — iCloud backups, Facebook messaging, etc. — means some degree of vulnerability that, let’s not forget, is sometimes justifiably leveraged. Law enforcement can get a warrant for those backups or chat logs, just as they can install a wire tap.

Again, this isn’t going to stop determined bad actors, but as I noted, nothing is. The question is what of the rest, those that get swept up by the worst sort of communities, and who commit legitimate crimes: what should their defaults be?

I made a similar argument about Facebook’s plans to encrypt-by-default Facebook Messenger conversations, which I opposed, even as I supported encryption-by-choice: I am not anti-encryption, and am in fact very much against mandated backdoors. Every user should have the capability to lock down their devices and their communications; bad actors surely will. At the same time, it’s fair to argue about defaults and the easiest path for users: I think the iPhone being fundamentally secure and iCloud backups being subject to the law is a reasonable compromise.

Apple’s choices in this case, though, go in the opposite direction: instead of adding CSAM-scanning to iCloud Photos in the cloud that they own and operate, Apple is compromising the phone that you and I own and operate, without any of us having a say in the matter. Yes, you can turn off iCloud Photos to disable Apple’s scanning, but that is a policy decision; the capability to reach into a user’s phone now exists, and there is nothing an iPhone user can do to get rid of it.

A far better solution to the “Flickr problem” I started with is to recognize that the proper point of comparison is not the iPhone and Facebook, but rather Facebook and iCloud. One’s device ought to be one’s property, with all of the expectations of ownership and privacy that entails; cloud services, meanwhile, are the property of their owners as well, with all of the expectations of societal responsibility and law-abiding which that entails. It’s truly disappointing that Apple got so hung up on its particular vision of privacy that it ended up betraying the fulcrum of user control: being able to trust that your device is truly yours.

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


  1. Google made 547k 

  2. Beyond the fact that it may be illegal  

Metaverses

Satya Nadella, for the record, was first: on May 25, 2021, during the keynote for Microsoft’s Build developer conference, he characterized a collection of Azure offerings as a metaverse:

Finally, as the virtual and physical worlds converge the metaverse made up of digital twins, simulated environments, and mixed reality, is emerging as a first-class platform. With the metaverse the entire world becomes your app canvas. With Azure Digital Twins you can model any asset or place with Azure IoT and keep the digital twin live and up-to-date. Synapse tracks the history of digital twins and finds insights to predict future states, and with Azure you can build autonomous systems that continually learn and improve. Power Platform enables domain experts to expand on and interact with digital twin data using low-code/no-code solutions. And Mesh and Hololens brings real-time collaboration.

The term “enterprise metaverse” came a month later at the Microsoft Inspire sales force keynote, but it was only on last week’s earnings call that most of the press caught on. As usual, no one cares unless Facebook is involved.

Metaverse Definitions

Facebook’s metaverse coming out party was this conversation between CEO Mark Zuckerberg and Casey Newton, which came on the heels of an internal presentation Zuckerberg gave at Facebook.

Newton: You told your employees that your future vision of Facebook is not the two-dimensional version of it that we’re using today, but something called the metaverse. So what is a metaverse and what parts of it does Facebook plan to build?

Zuckerberg: This is a big topic. The metaverse is a vision that spans many companies — the whole industry. You can think about it as the successor to the mobile internet. And it’s certainly not something that any one company is going to build, but I think a big part of our next chapter is going to hopefully be contributing to building that, in partnership with a lot of other companies and creators and developers. But you can think about the metaverse as an embodied internet, where instead of just viewing content — you are in it. And you feel present with other people as if you were in other places, having different experiences that you couldn’t necessarily do on a 2D app or webpage, like dancing, for example, or different types of fitness.

I think a lot of people, when they think about the metaverse, they think about just virtual reality — which I think is going to be an important part of that. And that’s clearly a part that we’re very invested in, because it’s the technology that delivers the clearest form of presence. But the metaverse isn’t just virtual reality. It’s going to be accessible across all of our different computing platforms; VR and AR, but also PC, and also mobile devices and game consoles. Speaking of which, a lot of people also think about the metaverse as primarily something that’s about gaming. And I think entertainment is clearly going to be a big part of it, but I don’t think that this is just gaming. I think that this is a persistent, synchronous environment where we can be together, which I think is probably going to resemble some kind of a hybrid between the social platforms that we see today, but an environment where you’re embodied in it.

The key difference between the Internet and the metaverse is the idea of “presence”; Matthew Ball, who has written extensively about the concept, including a ten-part Metaverse Primer earlier this summer, defined the Metaverse in 2020 as having these seven qualities:

  1. Be persistent – which is to say, it never “resets” or “pauses” or “ends”, it just continues indefinitely
  2. Be synchronous and live – even though pre-scheduled and self-contained events will happen, just as they do in “real life”, the Metaverse will be a living experience that exists consistently for everyone and in real-time
  3. Be without any cap to concurrent users, while also providing each user with an individual sense of “presence” – everyone can be a part of the Metaverse and participate in a specific event/place/activity together, at the same time and with individual agency
  4. Be a fully functioning economy – individuals and businesses will be able to create, own, invest, sell, and be rewarded for an incredibly wide range of “work” that produces “value” that is recognized by others
  5. Be an experience that spans both the digital and physical worlds, private and public networks/experiences, and open and closed platforms
  6. Offer unprecedented interoperability of data, digital items/assets, content, and so on across each of these experiences – your “Counter-Strike” gun skin, for example, could also be used to decorate a gun in Fortnite, or be gifted to a friend on/through Facebook. Similarly, a car designed for Rocket League (or even for Porsche’s website) could be brought over to work in Roblox. Today, the digital world basically acts as though it were a mall where every store used its own currency, required proprietary ID cards, had proprietary units of measurement for things like shoes or calories, and different dress codes, etc.
  7. Be populated by “content” and “experiences” created and operated by an incredibly wide range of contributors, some of whom are independent individuals, while others might be informally organized groups or commercially-focused enterprises

As for the term “Metaverse”, it was coined by Neal Stephenson in 1992’s Snow Crash; this is how Stephenson introduced the idea:

The top surface of the computer is smooth except for a fisheye lens, a polished glass dome with a purplish optical coating. Whenever Hiro is using the machine, this lens emerges and clicks into place…The lens can see half of the universe—the half that is above the computer, which includes most of Hiro. In this way, it can generally keep track of where Hiro is and what direction he’s looking in…

A narrow beam of any color can be shot out of the innards of the computer, up through that fisheye lens, in any direction. Through the use of electronic mirrors inside the computer, this beam is made to sweep back and forth across the lenses of Hiro’s goggles, in much the same way as the electron beam in a television paints the inner surface of the eponymous Tube. The resulting image hangs in space in front of Hiro’s view of Reality. By drawing a slightly different image in front of each eye, the image can be made three-dimensional. By changing the image seventy-two times a second, it can be made to move. By drawing the moving three-dimensional image at a resolution of 2K pixels on a side, it can be as sharp as the eye can perceive, and by pumping stereo digital sound through the little earphones, the moving 3-D pictures can have a perfectly realistic sound track.

So Hiro’s not actually here at all. He’s in a computer-generated universe that his computer is drawing onto his goggles and pumping into his earphones. In the lingo, this imaginary place is known as the Metaverse. Hiro spends a lot of time in the Metaverse. It beats the shit out of the U-Stor-It.

Stephenson’s Metaverse had many of qualities Zuckerberg and Ball highlighted, including persistence, being synchronous and live, and the quality of being filled with “content and experiences created and operated by an incredibly wide range of contributors”; the vision in Snow Crash, though, had two crucial differences that made it fundamentally different.

The Missing Internet

The fact of the matter is that, contra Zuckerberg, the Metaverse of Snow Crash is virtual reality; when Hiro Protagonist, the, uhm, protagonist, wants to look up information in the Library, he needs to enter the Metaverse by putting on his goggles (he can ask the Librarian to speak to him while he is in the real world, but only after establishing his presence). What happens in the Metaverse does not impact what happens in reality (with the exception of Snow Crash — that is part of the mystery of the novel). This all makes sense in the book because the Internet does not exist.

Zuckerberg, however, is announcing Facebook’s new mission in a world with the Internet, which is why he tried to expand his definition to basically be Internet+. After all, we can already connect to the Internet from anywhere, and from any device; the Internet, too, is about not just gaming and entertainment, but all aspects of life. There is, admittedly, not much dancing, until you remember that Epic makes a fortune selling emotes, which lets your Fortnite character dance.

From this perspective Facebook’s grand metaverse mission sounds an awful lot like VR re-branded. And honestly, that’s perfectly fine! I’ve long been skeptical about Facebook’s investments in VR, but over the last year in particular, as Apple’s iOS changes have highlighted Facebook’s platform risk, I’ve come around to Zuckerberg’s point of view. There are far worse things for a massively profitable company to invest in than what could very well be a key platform of the future. And, naturally, whatever Facebook builds for VR will be accessible elsewhere, whether that be AR, mobile, or your computer; Facebook’s goal isn’t the Internet, it’s bigger than that.

The Missing Monopolist

Stephenson, for his part, never anticipated a company like Facebook. From a 2017 interview with Vanity Fair:

One of the things that’s been interesting to observe with the rise of social media is the way in which the same technologies that initially seemed to be uniting us have in fact driven us further apart. Do you see virtual reality as ultimately contributing to the same political polarization that we’ve seen divide Twitter and Facebook?

Well, first, I should make full disclosure that I totally did not see that coming. Even a few years ago, to say nothing of 25 years ago, I really didn’t see the whole social-media bubble thing coming and didn’t — even when I became aware of it — didn’t really get its significance until November 8, 2016. So, that one I missed. The way that the Metaverse is designed — keeping in mind that this was pre-Internet as we know it, pre-Worldwide Web, just me making shit up — there’s only one Metaverse. You have to go there, you can’t set up your own.

This is, in retrospect, the most unrealistic part of Snow Crash. The Metaverse is governed by the Association for Computing Machinery’s Global Multimedia Protocol Group; it is accessed and maintained by a fiber optic monopoly owned by one L. Bob Rife. Rife is the bad guy in the story, running a cult from an aircraft carrier and trying to use Snow Crash to break the minds of hackers like Hiro; it never occurs to Rife to leverage the fact that he owns the wires Hiro and everyone else depends on.

Indeed, Rife is, from the Ball perspective, a bit of a hero: his monopoly is a hands-off one, creating the conditions for not just persistence and being synchronous but also a virtual economy with full interoperability between the various entities in the Metaverse. The Metaverse simply exists in a way that, well, the Internet does: anyone can set up a server on the Internet, and anyone can buy a plot of land in the Metaverse.

In truth, though, this vision of the Internet feels increasingly obsolete: actually keeping a server online means having an Internet Service Provider, which may impose bandwidth constraints at best, and cut you off for arbitrary content rules at worse; national regulators in an increasing number of countries want to control the bits on local bandwidth, professing outrage at China’s Great Firewall even as their actions evince a certain degree of envy. The most economical and secure solution is to use the public cloud, but that subjects you to a private company’s terms of use, the violations of which make its unaccountable and unreachable executives prosecutor, judge, and jury. The situation is even worse if you want to reach potential customers: the vast majority of computing devices in the world are access-controlled by Apple and Google, which not only impose limits on content but also tax their economies at a 30% rate; the only interoperability that exists are the remains of the open Internet. One can certainly make the case that Stephenson didn’t see this coming either — except that he kind of did.

The Snow Crash Dystopia

Not all of the events of Snow Crash take place in the Metaverse; Stephenson’s real world is, arguably, far more interesting. Nearly everything is privatized, from neighborhoods to roads to law enforcement; private corporations (including the Mafia) operate “Franchise-Organized Quasi-National Entities” that own properties across the country and include citizenship and privileged access. Hiro, for example, is a citizen of “Mr. Lee’s Greater Hong Kong” (which is not affiliated with the city), and he flees to one of its properties midway through the book:

“Welcome to Mr. Lee’s Greater Hong Kong, Mr. Protagonist,” the security system says through a P.A. speaker. “And welcome to your guest, Ms. Y.T.”

The other taxis have stopped in formation along the curb. Several of them overshot the Hong Kong franchise and had to back up a block or so. A barrage of doors thunking shut. Some of them don’t bother, just leave the engines running and the doors wide open. Three jeeks linger on the sidewalk, eyeing the tire shreds impaled on spikes: long streaks of neoprene sprouting steel and fiberglass hairs, like ruined toupees. One of them has a revolver in his hand, pointed straight down at the sidewalk.

Four more jeeks run up to join them. Y.T. counts two more revolvers and a pump shotgun. Any more of these guys and they’ll be able to form a government. They step carefully over the spikes and onto the lush Hong Kong lawngrid. As they do, the lasers appear once more. The jeeks turn all red and grainy for a second.

Then something different happens. Lights come on. The security system wants better illumination on these people.

Hong Kong franchulates are famous for their lawngrids — whoever heard of a lawn you could park on? — and for their antennas. They all look like NASA research facilities with their antennas. Some of them are satellite uplinks, pointed at the sky. But some of them, tiny little antennas, are pointed at the ground, at the lawngrid.

Y.T. does not really get this, but these small antennas are millimeter-wave radar transceivers. Like any other radar, they are good at picking up metallic objects. Unlike the radar in an air traffic control center, they can rez fine details. The rez of a system is only as fine as its wavelength; since the wavelength of this radar is about a millimeter, it can see the fillings in your teeth, the grommets in your Converse high-tops, the rivets in your Levi’s. It can calculate the value of your pocket change.

Seeing guns is not a problem. This thing can even tell if the guns are loaded, and with what sort of ammunition. That is an important function, because guns are illegal in Mr. Lee’s Greater Hong Kong.

The folks with the guns are summarily disarmed by a cyborg dog — this is a science fiction novel! — but the point is that the rules in Greater Hong Kong are different than the rules in Nova Sicilia or Metazania or New South Africa or Narcolombia, despite the fact they all exist in what was nominally the United States (the actual government only actually exists in secured enclaves of its own). They are, quite literally, walled gardens.

In this way the Metaverse is actually a unifying force for Stephenson’s dystopia: there is only one virtual world sitting beyond a real world that is fractured between independent entities. There are connections in the real world — roads and helicopters and airplanes exist — but those connections are subject to tolls and gatekeepers, in contrast to the interoperability and freedom of the Metaverse.

In other words, I think that Stephenson got the future exactly backwards: in our world the benevolent monopolist is the reality of atoms. Sure, we can construct borders and private clubs, just as the Metaverse has private property, but interoperability and a shared economy are inescapable in the real world; physical constraints are community. It is on the Internet, where anything is possible, that walled gardens flourish. Facebook has total control of Facebook, Apple of iOS, Google of Android, and so on down the stack. Yes, HTTP and SMTP and other protocols still exist, but it’s not an accident those were developed before anyone thought there was money to be made online; today’s APIs have commercial intent built-in from first principles.

The Future of Metaverses

This is why I don’t think it is absurd that Nadella was the first tech executive to endorse the metaverse as a strategic goal. There is likely to be good business in building private metaverses for private companies, in a not-dissimilar way to Stephenson’s Franchise-Organized Quasi-National Entities made it easy for small-scale entrepreneurs to set up their own franchise-states.

Facebook’s goal is more audacious: the company already serves 3.5 billion users, which means creating a shared reality for over half of the world is a plausible goal. That reality, though, will likely sit alongside other realities, just as Facebook the app sits alongside other social networks. This metaverse is universal, but not exclusive.

What I am skeptical of is the idea of there being one Metaverse to rule them all; we already have that, and in this case the future is, in William Gibson’s turn of phrase, here — it’s just not very evenly distributed. I speak from personal experience: for two decades I have lived and worked primarily on the Internet; it’s where I experience friendship and community and make my living. Over the last year-and-a-half hundreds of millions of people have joined me, as the default location for the work has switched from the office to online (that “online” is primarily experienced at home does not mean that home is intrinsic to the work — “work from home” is a misnomer). This too is an inverse of Snow Crash, where most jobs are in the real world, and recreation in the Metaverse; the future of work is online,1 and the life one wants to live in the reality of one’s choosing.


  1. At least for a privileged minority; notably, in Snow Crash only a minority of people have access to the Metaverse 

Instagram’s Evolution

Last week Head of Instagram Adam Mosseri posted a video on Instagram about Instagram:

Hey everyone, I thought it would be good to start sharing more about what we’re currently working on at Instagram just to give you a sense of what is coming before it comes. Right now, we are trying to build new experiences primarily in four areas. The first is creators, and I’ve talked a lot about creators and trying to help them make a living. And this has to do with the shift in power from institutions to individuals across industries. The second is video. Video is driving an immense amount of growth online for all the major platforms right now, and I think it’s something we need to lean into more — and I’m actually going to talk about that more in a minute. The third is shopping. Now the pandemic shifted, or accelerated the shift of commerce from offline to online by a number of years, and we’re trying to lean into that trend. And the fourth is messaging. How people connect with their close friends has changed a lot over the last five years or so and it has moved primarily to Messaging and away from Feed and Stories products.

But today I actually want to talk a bit more about video. And I want to start by saying we’re no longer a photo-sharing app or a square photo-sharing app. The number one reason that people say that they use Instagram in research is to be entertained. So people are looking to us for that. So actually, this past week in our internal all hands, we shared, or I shared, a lot about what we’re trying to do to lean into that trend — into entertainment and into video. Because let’s be honest: there’s some really serious competition right now. TikTok is huge, YouTube is even bigger, and there’s lots of other upstarts as well. And so people are looking to Instagram to be entertained, there’s stiff competition and there’s more to do, and we have to embrace that. And that means change.

So what you’re going to see over the next couple of months really is us start to experiment more in the space of what we call recommendations, so showing you things in Feed that you may not be following yet. We just started testing an early version of this last week. This week is a new version that’s coming out with topics where you can say which topics you want to see more of or less of. But we’re also going to be experimenting with how do we embrace video more broadly — full screen, immersive, entertaining, mobile-first video. And so you’ll see us do a number of things, or experiment with a number of things in this space over the coming months. Now we have an idea of where we want to end up in half a year or a year’s time, but I’m sure things are going to change many times between now and then. This isn’t something that we can just do overnight. So you’ll see us iterate and try and be very public about what we’re doing and why with videos like this one. Anyhow, hopefully you’ll enjoy it.

Everyone that I’ve seen, from Twitter to my teenage daughter, is quite certain they will not enjoy it. Why does the beloved photo-sharing service have to copy everyone else, and not simply do what it is best at?

The reality, though, is that this is what Instagram is best at. When Mosseri said that Instagram was no longer a photo-sharing app — particularly a “square photo-sharing app” — he was not making a forward-looking pronouncement, but simply stating what has been true for many years now. More broadly, Instagram from the very beginning — including under former CEO Kevin Systrom — has been marked first and foremost by evolution.

From Tool to Network

It may be hard to remember now, but Instagram didn’t even start as primarily a photo-sharing app: it was a photo-filter app, focused on making photos look good on ancient iPhone cameras and posting them on other social networks. It was, to use Chris Dixon’s parlance, a tool that evolved into a network:

Instagram’s initial hook was the innovative photo filters. At the time some other apps like Hipstamatic had filters but you had to pay for them. Instagram also made it easy to share your photos on other networks like Facebook and Twitter. But you could also share on Instagram’s network, which of course became the preferred way to use Instagram over time.

This was certainly an innovative approach, but even then Instagram didn’t get off the ground in isolation: the app famously booted up its initial network on top of the Twitter graph, allowing you to easily discover and follow everyone you already followed on Twitter. Instagram’s success in doing so remains one of the most powerful arguments for interoperability as a means of driving competition; it is disappointing that regulations like GDPR have redefined privacy to make it impossible to carry your contacts to other services. The important takeaway for this article, though, is that Instagram was defined by evolution from the very beginning.

Video on Instagram

To that end, the idea that Instagram isn’t simply a photo-app is hardly original to Mosseri; Instagram founder Kevin Systrom defined the service this way in 2013:

When we joined Facebook, a lot of people asked me this question: What is Instagram? What is Instagram all about? It’s a tough question, not because it’s not discoverable, not because it’s intangible, but instead because it takes on a different form depending on who asks the question and who answers it. When I think about what Instagram is I think about moments, and I think about visual imagery. What I can tell you is that at our core visual imagery is everything. It’s in our DNA, and it’s what drives us…

Photos are certainly “moments” and “visual imagery”, but only a subset; video was the obvious evolution.

If we’re about capturing and sharing the world’s moments, what’s next? What do we work on? We’ve taken photos and made them beautiful, we’ve connected people from all different countries around the world, all different cultures. What do we work on next? I’m going to tell you a story. That story is September of 2010, and Mike, my co-founder, and I were sitting in front of a whiteboard pondering what’s next. Two entrepreneurs not really knowing what to do, what’s next. We were working on a small location-sharing app called Bourbon. As part of Bourbon you could share your location, and the two parts of sharing your location were posting a photo and posting a video. We decided that we needed to do something new, so we created Instagram out of Bourbon.

The one part that we brought was photos, but we left video on the side. Why is that? Because we said the three things we want to be really good at are speed, simplicity, and beauty. And I’ll you, at the time two years ago, with the devices as they were, speed, simplicity and beauty were definitely possible with photos. But it was really hard with video. Today that all changes, and Instagram is going to be at the center of it. I’d like to introduce Video on Instagram.

One of the defining characteristics of digital services relative to analog services is that they need not be limited by medium: a magazine can only ever have photos, while a television show can only ever be videos, but when everything is 1s and 0s there is no need to be constrained by one particular manifestation of those 1s and 0s. Instagram has understood this from the beginning; the fact it started as only a photo app was due to the constraints of technology, not ideology.

Algorithmic Feed

Instagram’s third evolution was the introduction of the algorithmic feed, which was met with handwringing that sounds rather similar to the responses to Mosseri’s video. I wrote in 2016 in a Daily Update:

As is their wont, The New York Times got comments from not only analysts and Instagram executives but also a person-on-the-street, and this one delivered:

Vickie Mulkerin, a 49-year-old Instagram user…said she appreciated the immediacy of the Instagram feed. “I like how I can open the app and see what my stepsister Ashley is doing today with my niece and nephew, right in that very moment,” she said. “I want to judge what’s important, not have some algorithm tell me what it thinks is important.”

If you think that quote looks familiar, well, welcome to pretty much every story about the Facebook algorithm: users are sure they know better, but as any Facebook executive will tell you, users are much more engaged with an algorithmic feed…

One common misconception about why Facebook has an algorithmic feed is that it is to allow for advertising; that, though, doesn’t really make much sense. Facebook could include advertising in a time-based feed just as easily; indeed, that’s what the company does with Instagram today. Rather, an algorithmic feed is exactly what Facebook says it is: a way to drive engagement by showing users more of what they actually want to see, and, by virtue of driving engagement, gaining the opportunity to show users that many more ads.

Mosseri cited user research showing that Instagram users use the app for entertainment, but I strongly suspect that the service is even more convinced by the way users actually use the app: Facebook knows better than anyone that, when it comes to their services, revealed preference — what users actually do — is a far more powerful indicator than stated preference — what they say they want.

This was the biggest lesson from one of the most important episodes in Facebook’s history: the introduction of the News Feed, which was met by protests both on Facebook (naturally), and even outside of the company’s offices in Palo Alto. The irony, as David Kirkpatrick noted in The Facebook Effect, is that the reason protests sprung up so quickly is that the News Feed worked: it surfaced and organized information that users cared about in a way that was only possible with an algorithmically-driven Internet service. Facebook added some token privacy controls to mollify those initial objections, but the company didn’t compromise on the concept itself, which became the foundation of the company’s explosive growth and, it should be noted, was copied by everyone else — including Instagram.

Stories

Instagram’s biggest shift, though, and the episode from which you can draw a straight line to Mosseri’s video, was its introduction of Stories. While a feed was native to digital — endless content, customized to you — Stories, pioneered by Snapchat, were native to mobile specifically. They filled your entire screen and either advanced on their own or with a simple tap; their ephemeral nature was also a powerful lure to keep you coming back to the app day-after-day.

What was impressive about this shift was, in fact, the shamelessness; I called it The Audacity of Copying Well. What differentiated Instagram was the product of its initial evolution — the network — and adding a new format to that network was, broadly speaking, no different than adding an algorithmic feed. Now you could access “Moments”, to use Systrom’s parlance, in what was frankly a better format. That may have seemed controversial at the time, but five years on Instagram knows better than anyone the degree to which users prefer Stories to a feed; speaking for myself I find myself only scrolling the Instagram Feed once my Stories have been exhausted — which rarely happens.

This shift did cause Facebook some short-term pain; advertisers were used to feed advertising, and it took a couple of years and some painful earnings calls for them to catch up to user behavior, but catch up they did. From a Daily Update earlier this year:

The most notable takeaway from last quarter’s results was the increase in prices-per-ad for the first time since the end of 2017.

Facebook's advertising metric growth rates over time

That 2018 decline was driven by the push to monetize Stories, and while many interpreted Facebook’s somewhat middling results in 2018 as a reason to be bearish, I was optimistic Stories were a big opportunity; I predicted in a Daily Update from August 2018:

The key thing to remember is that advertisers always lag users: there were millions of people using the Internet on desktops before advertisers really got on board, and then there were hundreds of million of people using mobile before advertisers came along. In every case some analysts made the mistake of assuming that advertising would never catch up, but it eventually did, and it seems far more likely than not that the story will be the same for Stories…

This is exactly what has happened. Increasing usage of Stories increased impressions, which is deflationary, but as advertisers have embraced the format that has increased competition for those impressions, ultimately increasing prices.

Facebook’s business results give credence to my anecdotal observation about user behavior: people click through Stories far more than they scroll through their feed.

Taking on TikTok

One thing that Mosseri was certainly right about is that TikTok is a serious competitive threat to Facebook. App Annie reported in its State of Mobile 2021 report that in the United States time spent on TikTok had surpassed both the Facebook app and Instagram:

TikTok has the most usage in the U.S. according to AppAnnie

While the FTC didn’t even mention TikTok in its antitrust case against Facebook — small wonder the suit was dismissed for lacking a reasonable market definition — this is clearly a big problem for an advertising-based business. The defining characteristic of digital is abundance, thanks to the zero marginal cost nature of transmitting 1s and 0s, which means that time, thanks to its inherent scarcity, is the most important plane of competition.

TikTok, though, has been particularly difficult for Facebook and Instagram to respond to for three reasons:

  • First, if Instagram has been defined by sharing moments, TikTok has been about manufacturing them, with easy-to-use tools that commoditize creation.
  • Second, TikTok has defined a new format, distinct from both a scrollable feed and tappable stories: swipeable videos that are melding of both. TikTok provides both an endless feed and a full-screen immersive experience that is easily navigable.
  • Third, TikTok isn’t really a social network at all, which freed the service to surface the most compelling content from anywhere in the world, not simply from your network.

The first issue was easier to address, which is how we came by Instagram Reels. Sure, it may not be as intuitive as TikTok’s video editor, but Reels is improving rapidly. The problem for Instagram, though, is that building tools is relatively easy; creating a virtuous cycle of creation and consumption is much more difficult.

This is where the shift to Stories created an opportunity: if you look at the Instagram home screen, the vast majority of time is spent in a relatively small amount of space:

Much of Instagram's UI is devoted to the legacy feed

While Reels did recently get its own tab at the bottom, I suspect that Instagram’s plan is to push Reels content into that main feed, and as Mosseri noted, that includes content from creators “you may not be following yet.” In other words, Instagram, having shifted the primary use case of the app from the Feed to Stories, is going to transform said feed to address its two remaining shortcomings relative to TikTok: a new consumption experience, and content from anywhere.

This is a risky shift, to be sure, but so was the shift to Stories; I wrote at the time:

It’s not certain Facebook and Instagram will succeed, and the risk is significant: the only thing harder than rewiring users’ expectations for a massively successful product is ensuring said rewiring doesn’t turn them off from the app entirely, destroying the very value you are trying to leverage.

Facebook, though, also knows the danger of standing still.

The Entertainment Goal

To this point I have framed Mosseri’s announced changes in the context of Instagram’s continual evolution as an app, from photo filters to network to video to algorithmic feed to Stories. All of those changes, though, were in the spirit of Systrom’s initial mission to capture and share moments. That is why perhaps the most momentous admission by Mosseri is that Instagram’s new mission is simply to be entertainment.

In truth, though, this has always been social media’s most important job. Back in 2015 I argued in Facebook and the Feed that the company was constraining itself by only thinking in terms of its network:

I suspect that Zuckerberg for one subscribes to the first idea: that people find what others say inherently valuable, and that it is the access to that information that makes Facebook indispensable. Conveniently, this fits with his mission for the company. For my part, though, I’m not so sure. It’s just as possible that Facebook is compelling for the content it surfaces, regardless of who surfaces it. And, if the latter is the case, then Facebook’s engagement moat is less its network effects than it is that for almost a billion users Facebook is their most essential digital habit: their door to the Internet…

This course, though, depends on Facebook giving users exactly what they want, or at least a good enough mix, in their News Feed, and as I noted, I’m not convinced personal updates is enough. Moreover, while Facebook may view “the network” as their differentiator, the fact is that a lot of “friend” sharing is indeed moving to alternative networks like Snapchat and LINE and WhatsApp. With this News Feed update I am concerned that Facebook is limiting itself and committing to a battle — the private sharing of information — it can’t necessarily win.

Consider Facebook’s smartest acquisition, Instagram. The photo-sharing service is valuable because it is a network, but it initially got traction because of filters. Sometimes what gets you started is only a lever to what makes you valuable. What, though, lies beyond the network? That was Facebook’s starting point, and I think the answer to what lies beyond is clear: the entire online experience of over a billion people. Will Facebook seek to protect its network — and Zuckerberg’s vision — or make a play to be the television of mobile?

Six years on and it seems likely that Facebook’s usage is at best holding steady — it was reportedly declining before the pandemic — and at a minimum declining relative to the competition; meanwhile, the service has been transitioning to much more of a utility, with a greater focus on Groups and offerings like Marketplace. Perhaps that was ultimately the best path for an app so deeply tied to the idea of a social network, but it also gives that much more of an impetus for Instagram to shift to an even broader vision: a one-stop shop for entertainment on your phone.

Of course the network isn’t going away: Facebook has leaned into the aforementioned shift to private messaging across its platforms, including Instagram; I probably should have added the 2013 addition of Instagram Direct to the number of ways the service has evolved over the years — it’s a long list! Indeed, that is the real answer as to what Instagram, particularly under Facebook, is ultimately about: moments, yes, but their fleeting nature. Instagram may have started with a goal of preserving them, but it has never been a service particularly concerned about getting stuck in them.

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

The Lightness of Windows

From Ian Sherr, writing about last week’s Windows 11 announcement for CNET:

When you choose a computer or smartphone to buy these days, you have to pick between several factions. There’s Apple world, which includes the Mac computer, iPhones and iPads, all designed to work together to help you share files, video chat and watch TV as easily as possible. There’s also Google land, whose Android software powers an array of phones, tablets and computers. But with Windows 11, Microsoft wants to break that mold.

The software giant said Thursday that its next major version of Windows will launch as a free upgrade this fall, offering a host of new features that in some ways appear designed to position Microsoft as the company whose products work with ones from Apple, Google and pretty much anyone else.

The company’s expanding its support for the Android app for example, allowing people to more easily run phone apps on their computer. Microsoft’s building its Teams software into Windows in a similar way as Apple’s FaceTime is built into Macs — except Microsoft doesn’t want it to be exclusive. There’s already a Microsoft Teams app for Mac, iPhones and Androids. (Microsoft CEO Satya Nadella even told a reporter he’d be happy to accept FaceTime onto Microsoft computers.)

I really enjoyed this event; coming in at a tight 44 minutes and 51 seconds, it had a sort of playfulness and lightness that felt like a big contrast to Apple’s COVID-era commercial-like presentations. It feels like a bit of a role reversal from twenty years ago when Microsoft would have grand over-produced events at CES while Apple put on budget productions at Macworld.

That’s not a surprise, when you think about it: back then new versions of Windows meant new experiences for basically everyone who used a computer, new opportunities for developers, and new reasons to worry for competitors scared that this might be the year Microsoft made their products a feature. Apple, on the other hand, had nothing to lose.

Today is the opposite: Apple reigns supreme over the computing landscape. iOS 15 will bring new experiences to a billion users, new APIs provide new opportunities for developers, and Apple isn’t just building in features that hurt competitors, but creating new ones (i.e. Facebook and app install advertising); it is Windows that feels like it has nothing to lose.

The End of Windows

Of course Windows remains essential software, with a billion-plus userbase of its own, and a critical part of the enterprise landscape in particular (although, as the company highlighted in the presentation, COVID re-established the importance of the PC for consumers as well). What gives Microsoft more freedom-of-movement, though, is that Windows is no longer the core of its business. This remains CEO Satya Nadella’s biggest triumph; I recounted how he shifted the company away from its Windows-centricity in 2018’s The End of Windows:

The story of Windows’ decline is relatively straightforward and a classic case of disruption:

  • The Internet dramatically reduced application lock-in
  • PCs became “good enough”, elongating the upgrade cycle
  • Smartphones first addressed needs the PC couldn’t, then over time started taking over PC functionality directly

What is more interesting, though, is the story of Windows’ decline in Redmond, culminating with last week’s reorganization that, for the first time since 1980, left the company without a division devoted to personal computer operating systems (Windows was split, with the core engineering group placed under Azure, and the rest of the organization effectively under Office 365; there will still be Windows releases, but it is no longer a standalone business). Such a move didn’t seem possible a mere five years ago, when, in the context of another reorganization, former-CEO Steve Ballmer wrote a memo insisting that Windows was the future…

Thus my assertion at the top, that the story of how Microsoft came to accept the reality of Windows’ decline is more interesting than the fact of Windows’ decline; this is how CEO Satya Nadella convinced the company to accept the obvious.

The rest of that article walks through how Nadella led Microsoft to that point, including Office on iPad, several of his strategy memos, and killing Windows Phone; I know it’s a cliché to say that something makes for a great business case study, but this really makes for a great business case study!

What Nadella’s change management also enabled was, to steal the title from Joanna Stern’s delightful interview with Nadella, a new “Start” for Windows:

A new "Start" for Windows

Yes, the reference was about moving the ‘Start’ menu to the center, but it applies to the Windows opportunity as well, and that opportunity only exists because what came before was already ended.

Apple’s Self-Reliance

To return to the Windows/Mac comparison of twenty years ago, Apple’s problem was certainly a lack of developers, but that was, above all, because the company simply didn’t have enough users. The way the company fixed the problem was exactly what you would expect from Apple: they relied on themselves. One of the most brilliant and underrated moves of the Steve Jobs era was the development of the iLife suite of apps — iMovie, iPhoto, iTunes, iDVD, and GarageBand. I noted last year in Apple’s Shifting Differentiation:

OS X brought software to the forefront, delivering not simply a technically sound operating system, but one that was based on Unix, making it particularly attractive to developers. And, on the consumer side, Apple released iLife, a suite of applications that made a Mac useful for normal users. I myself bought my first Mac in this era because I wanted to use GarageBand; 16 years on and my musical ambitions are abandoned, but my Mac usage remains.

By that point I was buying a Mac despite its hardware: while my iBook was attractive enough, its processor was a Motorola G4 that was not remotely competitive with Intel’s x86 processors; later that year Jobs made the then-shocking-but-in-retrospect-obvious decision to shift Macs to Intel processors. In this case having the same hardware as everyone else in the industry would be a big win for Apple, the better to let their burgeoning software differentiation shine.

The point of that article, which I wrote upon the release of the M1 Macs, is that Apple’s software differentiation, particularly in the case of the Mac, was the smallest it had been in many years, which is why it was appropriate that the company’s differentiation was shifting back to hardware. Interestingly, though, that means that Microsoft is by definition on the other side of that coin: to the extent that Apple Silicon is superior to x86 (or other ARM chips) is the extent to which Windows is at a disadvantage.

The Bill Gates Line

Microsoft, like Apple, is responding by doing what they do best, but, because it’s Microsoft, it’s the exact opposite of Apple: instead of more deeply integrating and doing everything themselves in an attempt to appeal to consumers, they are opening up and removing limitations in an attempt to appeal to developers, and by extension consumers who don’t want to be bound into Apple’s ecosystem.

Nadella expounded on this in a really excellent interview with Nilay Patel at The Verge:

Patel: That brings me to some of the big changes in Windows, which are fundamentally about what kind of operating system Windows is going to be and what kind of businesses you can run on it and what kind of business will that be for Microsoft.

There is a new user interface. The Start button is in the center of the screen. There’s cosmetic differences. But you’re also allowing Android apps to run on Windows. You are integrating the Amazon Android app store. You’ve made some changes to the store economics. You’ve reduced Microsoft’s cut to 15 percent. That’s in comparison to the very controversial 30 percent that Apple charges.

Then you’re saying to developers, “You can be in our store and you can not pay us a cut at all if you want to use your own payment model.” How much of that is opportunistic changes — you’re seeing all the controversy and you sense a market opportunity? And how much of it is this being the correct way to shift your business?

Nadella: I think it’s driven by competition. What I mean by that is – what should Microsoft do to manage the platform and the platform rules such that we can thrive in that role?

The way I’ve interpreted what platforms do is: they have to create opportunity for people who build on the platform. That’s the way to keep a platform relevant. If you’re creating a great opportunity for others to be born on your platform and scale on your platform — that’s the Microsoft I grew up in. That’s the Windows I grew up with. Whether it is the Adobe folks creating their Creative Cloud or SAP building their ERP [enterprise resource planning] business. Or in today’s world, whether it’s Discord building their community for gamers on Windows or any other business.

To me, how do we make Windows more vibrant going forward?

I sense a real opportunity, because the other two ecosystems that are at scale, for their own internally consistent set of reasons, have conflated — at least in my mind — the platform and the aggregation layer with one set of rules. There’s no reason why there should be one set of rules. They can be disaggregated. After all, we do have a store. We do have commerce. You can use it all or you can bring your own. That’s [a] practical thing for Microsoft to do.

I’m not even trying to make some value statement that Microsoft is virtuous here and others are not. Others have chosen it for whatever reasons they have. This is a design choice and a business model choice. I want to make our own set of design and business model choices so that creators find more choice.

It’s easy — and right! — to note that Microsoft definitely has nothing to lose when it comes to app stores. They don’t make that much money from the Windows App Store, and they (still) need to get more consumer apps for their platform. At the same time, Nadella’s framing of history very much fits with how Microsoft has always thought about Windows; I called it The Bill Gates Line:

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: 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.

Nadella referenced this exact point in the interview:

Nadella: In our case at Microsoft, I’ve always felt that, at least the definition of a platform is: if something bigger than the platform can’t be born, then it’s not a platform. The web, it grew up on Windows. Think about it. If we said, “All of commerce is only mediated through us,” Amazon couldn’t exist, if we had somehow said, “We’re going to have our own commerce model.”

Therefore I think each company has to choose and see what aggregation layer, what platform layer, [and] what rules work for them and their ecosystem. But, in our case, it’s very clear to us that we do want to solve for the same security issues, [and] discoverability issues, because that’s one of the reasons why we’re emphasizing the store. At the same time, the store can be used at different levels by different creators. We want to have that flexibility be a competitive differentiation.

There is, to be clear, some amount of motivated reasoning here; in response to a question as to whether Microsoft would allow Google’s Play Store on Windows (the answer is yes), one of the examples Nadella cited positively was the existence of multiple marketplaces for games, from the Microsoft Store to the XBox Game Pass to Steam to Epic. I can tell you, though, that when I worked on the initial version of the Microsoft Store a decade ago there was a lot of consternation that Steam had built what Microsoft felt it should have; what if the company had realized the app store opportunity first? Would it be so laid back about competing models if there were billions of dollars at stake?

Perhaps not, but I think that is a blessing in disguise. It’s hard to feel great about the impact of the App Store on Apple from any angle other than a financial one; it’s not simply a strategy tax, but a cultural one, not only poisoning the company’s relationship with developers but actually resulting in a worse experience for users, and it carries huge regulatory risk.

Return of Windows?

Back in 2005 Paul Graham wrote Return of the Mac:

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?…

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.

So Windows is open, both in terms of the software you can write on it, the software you can run, and the business models you can employ; Microsoft has thrown the doors wide open to everyone. That leads to the next obvious question: is it good? Certainly this approach is going to lead to a lot of inconsistency; Patel asked Nadella what was the best argument against Android apps on Windows:

Nadella: I think always the argument will be, “do we have to have a consistent app model?” Because if you think about innovation — is there is some kind of NUI or even an AI chip that we want to light up? How can the APIs of that be lit up in such a way that this application can take advantage of it? When you have multiple subsystems and multiple app models, can you surface your platform system-level innovation such that all apps light up?

That is going to be the fundamental challenge in such a world, but we feel that there are ways. One of the ways I look at this is you can light an Android app or a PWA app or a UWP app on Windows in the future, or even today, for some of the new AI APIs.

At Microsoft we build for iOS, we build for Android, we build for Windows. That’s one of [our] fundamental challenges. We’re trying to make sure that as developers, we can leverage as much of the common code base, as much of the cloud, but at the same time, be native on each platform.

Nadella’s last point actually leads to another answer to Graham’s challenge: does it matter? Apple’s shift to increasingly differentiate the Mac via hardware isn’t simply a function of the M1 being possible, but of the reality that for Macs and PCs the vast majority of essential software are web apps, or run on web technologies like Electron; meanwhile, in the one category where being native matters most — high performance games — Windows is as dominant as ever.

Perhaps that is why this presentation felt so playful and light: it might not matter. Windows is an essential business, but Nadella reduced its importance to Microsoft not out of spite, but because the the world had already changed before the company did.

Pandemic Progress

If the Internet Archive is to be believed, Marc Andreessen’s April 2020 coronavirus-driven exhortation It’s Time to Build never actually included that futuristic picture of skyscrapers; it’s in the metadata so that it shows up on social media like Twitter:

Marc Andreessen's "It's Time to Build" tweet

What is even more intriguing is when, exactly, the building happened; after all, Andreessen wrote last week in Technology Saves the World:

Last April, I issued a call to our technology industry that it was time to build — and I am so proud of how we delivered. Please join me in an enthusiastic — virtual! — round of applause for all of the amazing workers in our spectacular technology industry who made all this possible. The experience of COVID has made crystal clear both how important our technology is to human flourishing, and how well we can deliver. Technology helped save the world.

Mission accomplished?

Future Business Models

Andreessen’s new essay was published on Andreessen Horowitz’s (a16z) much-ballyhooed new media property Future; you will recall much of the media establishment losing its mind over the announcement in January; I argued in Publishing is Back to the Future that the announcement seemed to be part of a much larger shift in media from a world of scarcity, where newspapers were profitable thanks to geographic monopolies, to one of abundance, where publications succeeded based on their ability to attract audiences who could visit any website on the Internet:

To put it another way, what the New York Times has become is not so different from what Andreessen Horowitz is proposing to build. Margit Wennmachers said in that introductory post that “Our lens is rational optimism about technology and the future”; as a long time subscriber of the New York Times, I think it is fair to call their lens rational skepticism about technology and its effects. What is notable about both is that their lenses are perfectly aligned with their business models (and, I would note, both claim to be motivated to change the world).

a16z’s business model is, of course, venture capital, and Wennmachers, in an interview with Bloomberg’s Emily Chang, was clear that driving a16z’s venture business was the primary focus of Future:

I’m trying to accomplish a business goal. Our firm wants to advance the future and thinks that technology is a good force in the world, and by implication we think that will make us attractive to entrepreneurs, and that’s what our business is all about. The three things that matter in venture capital are seeing the deals, picking the deals, and very importantly, winning the deals. If my function can help us see the deals then I’m making a contribution to advancing the future.

Wennmachers added that Future wasn’t going to be focused on traditional news reporting, and, for the record, none of this is in conflict with the original announcement; that’s not to say the media’s overreaction wasn’t warranted: I can only imagine how many page views and subscription dollars were driven by said overreaction. Understanding business models has always been one of the most reliable ways to understand the behavior of organizations.

Technology Saves the World

One could certainly make a similar argument about the striking differences between It’s Time to Build and Technology Saves the World; in How Tech Can Build I noted that the venture capital business model, which is biased towards zero marginal cost business models, wasn’t particularly well-suited to the sort of industrial policy that Andreessen seemed to be espousing:

I agree with Andreessen that much of the software revolution is inevitable; I also agree that tech’s seeming exclusivity on innovation has also been about the online space being the one place without the inertia and regulatory capture Andreessen decries. If you are talented and ambitious, what better place to be?

What I also sense in Andreessen’s essay, though, is the acknowledgment that tech too has chosen the easier path. Instead of fighting inertia or regulatory capture, it has been easier to retreat to Silicon Valley, justify the massive costs of doing so by pursuing infinite-upside outcomes predicated on zero marginal costs, which means relying almost exclusively on software as the means of innovation.

Technology Saves the World seems to imply that is sufficient; Andreessen cites a number of ways that technology has excelled during the pandemic:

  • Vaccines, particularly those developed using mRNA, were created, tested, and delivered at scale within a year.
  • Telemedicine was enabled at scale.
  • The majority of businesses continued to function thanks to technology platforms that enabled remote work.
  • Huge numbers of small businesses moved online, thanks to platforms like Facebook, Instacart, Doordash, and more.
  • Schools figured out online learnings, laying the groundwork for a huge expansion in educational opportunities.
  • Online entertainment kept people entertained, and online networks kept people connected.
  • The realization that people can work remotely separated the link between geography and economic opportunity.

This leads to the cynical argument: all of the pieces for these success stories were built before the pandemic hit — that’s why the U.S. was able to navigate the pandemic as well as it did. Which, conveniently enough, means that venture capital was already getting things right. It’s not-so-much “Time to Build” as it is “Keep Building the Things We Were Building All Along.” The business model is safe!

Revisiting Compaq and Coronavirus

Your ears may have perked up at the phrase “that’s why the U.S. was able to navigate the pandemic as well as it did”; wasn’t the American response an abject disaster? It certainly seemed so a year ago; Andreessen opened It’s Time to Build by writing:

Every Western institution was unprepared for the coronavirus pandemic, despite many prior warnings. This monumental failure of institutional effectiveness will reverberate for the rest of the decade, but it’s not too early to ask why, and what we need to do about it. Many of us would like to pin the cause on one political party or another, on one government or another. But the harsh reality is that it all failed — no Western country, or state, or city was prepared — and despite hard work and often extraordinary sacrifice by many people within these institutions. So the problem runs deeper than your favorite political opponent or your home nation.

I had struck a similarly despondent tone a couple of weeks earlier in Compaq and Coronavirus:

The fact of the matter is that we do make tradeoffs between human lives and economic activity all the time — speed limits are perhaps the most banal example. What is truly tragic is the utter lack of resolve and lack of a bias for action in this so-called tradeoff. The only options are to give up the economy or give in to the virus: the possibility of actually beating the damn thing is completely missing from the conversation. To put it another way, the West feels like Compaq in the 1990s, relying on its brand name and partnerships with other entities to do the actual work, forgetting that it was hard work and determination that made it great in the first place.

I drew a contrast to Taiwan, which responded rapidly to limit the spread of the coronavirus, and then kept it at bay for over a year, allowing life to operate normally. Today, though, the tables have turned: the U.S. is almost completely open, thanks to vaccines, while Taiwan, like many other Asian countries, is struggling with outbreaks and imposing lockdowns, and pinning their hopes in part on U.S. vaccine exports.

That’s not to minimize the massive suffering that occurred over the last year: over 600,000 deaths in the U.S., and a fatality rate of 183/100,000 people, 20th in the world (Taiwan, even with the recent outbreak, is at a mere 2/100,000 people). It is, though, a reminder that making grand pronouncements in the first inning is often a mistake. I reflected earlier this year in a Daily Update:

If one were to have presented you with a hypothetical in which the U.S. population was impossible to coordinate during a crisis, yet it was the U.S. that the led the way technologically and logistically in ending the crisis, that would make total sense, right? Moreover, it seems clear that the failure in the beginning is related to the triumph in the end: the U.S. remains a dynamic place with more variance than anywhere in the West, which is why you should expect both the highest highs (when there is a clear goal with an uncertain route to success) and the lowest lows (when there is an unclear goal with top down control).

Everything is indeed a trade-off, but what is important to remember is that the trade-off extends beyond a single pandemic as well. I don’t think it’s an accident that China both crushed the pandemic and also was the place where it originally spiraled out of control, thanks in part to the suppression of the spread of information; the country is also nowhere near opening up even as its vaccines are of questionable efficacy. Is it a stretch to wonder if a bias towards top-down control might be better for mass coordination problems, and worse for innovative and dynamic responses?

The Promise of Remote Work

I suspect this sort of reflection is just as much of a driver of Andreessen’s change of tone as is the a16z business model; after all, the first non-pandemic example he gave in It’s Time to Build of American sclerosis was housing:

You see it in housing and the physical footprint of our cities. We can’t build nearly enough housing in our cities with surging economic potential — which results in crazily skyrocketing housing prices in places like San Francisco, making it nearly impossible for regular people to move in and take the jobs of the future. We also can’t build the cities themselves anymore. When the producers of HBO’s “Westworld” wanted to portray the American city of the future, they didn’t film in Seattle or Los Angeles or Austin — they went to Singapore. We should have gleaming skyscrapers and spectacular living environments in all our best cities at levels way beyond what we have now; where are they?

However Technology Saves the World, as noted, highlights remote work:

For thousands of years, until the time of COVID, the dominant fact of every productive economy has been that people need to live where we work. The best jobs have always been in the bigger cities, where quality of life is inevitably impaired by the practical constraints of colocation and density. This has also meant that governance of bigger cities can be truly terrible, since people have no choice but to live there if they want the good jobs.

What we have learned — what we were forced to learn — during the COVID lockdowns has permanently shattered these assumptions. It turns out many of the best jobs really can be performed from anywhere, through screens and the Internet. It turns out people really can live in a smaller city or a small town or in rural nowhere and still be just as productive as if they lived in a tiny one-room walk-up in a big city. It turns out companies really are capable of organizing and sustaining remote work even — perhaps especially — in the most sophisticated and complex fields.

This is, I believe, a permanent civilizational shift. It is perhaps the most important thing that’s happened in my lifetime, a consequence of the Internet that’s maybe even more important than the Internet. Permanently divorcing physical location from economic opportunity gives us a real shot at radically expanding the number of good jobs in the world while also dramatically improving quality of life for millions, or billions, of people. We may, at long last, shatter the geographic lottery, opening up opportunity to countless people who weren’t lucky enough to be born in the right place. And people are leaping at the opportunities this shift is already creating, moving both homes and jobs at furious rates. It will take years to understand where this leads, but I am extremely optimistic.

There are echoes here of the self-serving arguments proffered by business executives who profited massively from moving jobs abroad: look at how much life improved for billions of people (particularly in China)! It’s a complicated argument because it is, objectively speaking, true; the human race as a whole is in a far better place today than it was forty years ago, thanks to globalization. At the same time, who believes that human betterment was the goal, as opposed to corporate profits? And what costs were incurred, both to middle class Americans and to America’s industrial capacity, in the meantime?

Still, the unbundling of work and geography seems like the only way to cut the Gordian Knot that is the U.S. housing crisis; NIMBY housing policies are a perhaps unavoidable outcomes of any democratic system that inherently favors those who live in a particular location over those that wish they did. It seems far more compatible with our ideals to overcome those problems with competition than top-down fiat, and technology has created the conditions for that sort of competition to occur. Perhaps it is appropriate that It’s Time to Build only had skyscrapers in metadata; the actual solution may be small towns and suburbs.

Progress

“Progress” is an interesting term nowadays; self-described Progressives like Ezra Klein, for example, responded to It’s Time to Build by bemoaning our inability to pass new laws:

The question, then, is why don’t we build? What’s stopping us? Here’s my answer: The institutions through which Americans build have become biased against action rather than toward it. They’ve become, in political scientist Francis Fukuyama’s term, “vetocracies,” in which too many actors have veto rights over what gets built. That’s true in the federal government. It’s true in state and local governments. It’s even true in the private sector.

I’m not against soliciting more ideas of what to build. But what we need is sustained funding, focus, and organizing to make building in America possible again. And that requires patiently engaging with the kinds of institutions that frustrate builders.

Klein is very sharp on the changes in U.S. politics that have driven increased polarization and the difficulty in passing new laws; at the same time, it is notable that the solution to an array of progressive priorities have come from competitive impulses. Take privacy, as an example: Apple’s iOS 14 changes, which are great for Apple’s business, have done far more to change the advertising industry than Europe’s GDPR, which only entrenched the biggest players. It’s the same thing with climate change: Tesla has driven a wholesale shift in the automative industry first-and-foremost by being cool, while solar prices have plummeted far faster than expectations; both are poised to succeed not by telling customers what they can’t do, but by making it more attractive to do what is better for the environment.

This for me is one of the biggest lessons from the last year: solutions that give customers what they want, from cooler cars to the ability to work from anywhere, are the way out of intractable problems, particularly if we want to remain true to Western values of self-determination and individual choice. That’s exactly what happened in the case of the pandemic: the U.S. didn’t beat the coronavirus by locking people up in their homes against their will, but by inventing new technology that let them live their lives as they wish. The ultimate governor on progress is the human condition, and catering to that reality, both in terms of what we build as well as why we build it, is a feature, not a bug.

One more point: it is notable, I think, that Technology Saves the World — along with most of Future’s initial slate of posts, I would add — didn’t really move the needle, particularly in contrast to the viral sensation that was It’s Time to Build. Even for Andreessen bad news is popular news!

That, though, is another feature-disguised-as-a-bug. Give me a world of invention and dynamism with media eagle-eyed for where things go wrong, over a world of conformism and stagnation with declarations that everything is going great. The value of what is built is borne out by reality on the ground — including the value of technology in the pandemic — while narratives are only as good as the restrictions on freedom necessary to make them unquestioned.

The Cicilline Salvo

From the Wall Street Journal:

House lawmakers proposed a raft of bipartisan legislation aimed at reining in the country’s biggest tech companies, including a bill that seeks to make Amazon.com Inc. and other large corporations effectively split in two or shed their private-label products. The bills, announced Friday, amount to the biggest congressional broadside yet on a handful of technology companies — including Alphabet Inc.’s Google, Apple Inc. and Facebook Inc. as well as Amazon — whose size and power have drawn growing scrutiny from lawmakers and regulators in the U.S. and Europe. If the bills become law—a prospect that faces significant hurdles—they could substantially alter the most richly valued companies in America and reshape an industry that has extended its impact into nearly every facet of work and life.

These bills are the ultimate outcome of the House Subcommittee on Antitrust’s investigation of tech companies that I have covered on Stratechery, including the hearing with the CEOs of Apple, Amazon, Google, and Facebook, and the ensuing report.

One of the bills — the Merger Filing Fee Modernization Act — is a straightforward increase in the filing fees for mergers (and tying said fees to inflation), meant to finance more in-depth review of said mergers. I agree that mergers ought to be an increased focus of regulators, and support this bill.

Definitions

The other four, meanwhile, vary in radicalness — and at times conflict with each other — but take care to target the same set of companies, specifically:

  • Companies with at least 50 million US-based monthly active users or at least 100,000 U.S.-based monthly active business users (defined as businesses operating on the platform) and:
  • Companies with net annual sales of or market capitalization greater than $600 billion, adjusted for inflation and:
  • Companies that are “a critical trading partner for the sale or provision of any product or service offered on or directly related to the online platform.”

“Critical trading partner” is defined as follows:

“The term “critical trading partner” means a trading partner that has the ability to restrict or impede:
(A) the access of a business user to its users or customers; or
(B) the access of a business user to a tool or service that it needs to effectively serve its users or customers

“Online platform” means:

A website, online or mobile application, operating system, digital assistant, or online service that:
(A) enables a user to generate content that can be viewed by other users on the platform or to interact with other content on the platform;
(B) facilitates the offering, sale, purchase, payment, or shipping of goods or services, including software applications, between and among consumers or businesses not controlled by the platform; or
(C) enables user searches or queries that access or display a large volume of information.

The bill is obviously targeting the aforementioned big four consumer tech companies, but Microsoft, despite not being a target of the subcommittee, clearly falls under the definition. There may be more covered companies as well, if not now then in the near future:

  • Visa has a market cap of $515 billion, and processes $11 trillion in payments. Obviously the vast majority of those payments go to merchants, and the largest portion of credit card fees go to banks, but “net annual sales” is not clearly limited to a company’s actual revenue; meanwhile, the company is clearly covered under the second definition of an online platform (Mastercard has a market cap of $363 billion).
  • JPMorgan Chase has a market cap of $477 billion and total assets of $3.7 trillion. Obviously the bank would argue it is not an “online platform” and that “net annual sales” is different than assets, but the former in particular seems like a questionable distinction.
  • Walmart has a market cap of $394 billion and a gross merchandise volume (GMV) of around $439 billion and is estimated to have 80,000 marketplace sellers, up from 50,000 a year ago.
  • PayPal has a market cap of $323 billion and total payment volume of $277 billion, up 39% year-over-year.
  • Shopify has a market cap of $162 billion and GMV of $119 billion, which nearly doubled year-over-year.

At a minimum “net annual sales” needs to be more clearly defined: is it total payment volume, gross merchandise value, or company revenue? And what specifically makes something an online platform — and why do we care about the difference?

The Four Bills

Here is what each of the four bills covers, presented in the order they are listed on Antitrust Subcommittee Chairman David Cicilline’s press release:1

American Innovation and Choice Online Act link

This bill, sponsored by Cicilline (D-RI) and co-sponsored by Lance Gooden (R-TX), bans covered platforms from giving an advantage to their own products, services, and lines of business over competitors; disadvantaging competing products, services, and lines of business; or discriminating between similarly situated business users. It further:

  • Bars any restrictions on interoperability that do not similarly apply to the platform owner
  • Explicitly bans tying (i.e. conditioning the use of one product on use of another)
  • Bans the use of data about the activities of third-party businesses to improve the platform’s own product
  • Forbids the platform from restricting the right of third-party businesses to use their own data generated on the platform
  • Requires platform owners to allow users to uninstall pre-installed applications and change defaults
  • Bans anti-steering provisions (i.e. Spotify being able to tell iOS users to subscribe online or link to the web)
  • Restricts the platform owner from treating the platform’s own products differently in search or rankings
  • Restricts the platform owner from controlling a business user’s pricing
  • Restricts the platform owner from limiting a business user’s interoperability
  • Bans retaliation by the platform owner against any business user that raises concerns with regulators

The bill does provide a privacy exception: actions that violate the above provisions can be legal if the platform owner can prove they were necessary to preserve user privacy while being narrowly tailored, non-discriminatory, and nonpretextual.

The bill also allows regulators to force the divesture of lines of business if it determines that said line of business presents a conflict of interest that leads to violation of this act.

Platform Competition and Opportunity Act link

This bill, sponsored by Hakeem Jeffries (D-NY) and co-sponsored by Ken Buck (R-CO), completely bans acquisitions by covered companies, unless the acquiring company proves that:

  • The acquired company does not compete with the platform in any way and:
  • Does not provide potential competition for the platform in any way and:
  • Does not enhance the platform’s offering in any way.

For good measure the act includes “user attention” as one of the vectors of competition; like I said, it bans all acquisitions.

Ending Platform Monopolies Act link

This bill, sponsored by Pramila Jayapal (D-WA) and co-sponsored by Lance Gooden (R-TX), is in many respects a repeat of the American Innovation and Choice Online Act, but instead of banning discriminatory behavior it simply bans platforms from owning any product or service that rest on top of its platform and compete with 3rd-parties in any way. The provision is as broad as it sounds, which is interesting to think about in a historical context: operating systems used to sell the networking stack separately — would it be illegal now for iOS to include TCP/IP? That’s just one obvious example of how this bill would quickly devolve into product design by the judiciary.

Augmenting Compatibility and Competition by Enabling Service Switching (ACCESS) Act link

This bill, sponsored by Mary Gay Scanlon (D-PA) and co-sponsored by Burgess Owens (R-UT), mandates API-driven data portability and interoperability, subject to “privacy and security standards for access by competing businesses or potential competing businesses to the extent reasonably necessary to address a threat to the covered platform or user data.” Platforms will have to petition the Federal Trade Commission (FTC) to make any changes to their interoperability interface. The FTC, meanwhile, will establish technical committees to enforce the measure with a clear charge to reduce network effects while establishing data security and privacy protections.

I am encouraged that this bill, unlike the GDPR, does not explicitly limit the sharing of information like a user’s contacts; at the same time, it doesn’t explicitly allow it either. This is the most important issue in terms of The Web’s Missing Interoperability: photos from five years ago aren’t what is keeping people on a particularly platform; their relationships are, and true portability and interoperability mean the social graph.

Cicilline’s Anchoring Strategy

I don’t think it is an accident that these bills were presented as a package, but I think it has been a mistake in a lot of coverage to view the package as one bill. It seems to me that Chairman Cicilline has played his cards very deftly here: start with the fact that while every bill was authored by a Democrat, they all have a Republican co-sponsor; if some combination of these regulations pass they will likely be with overwhelmingly Democratic support, but the fact they are starting out as nominally bi-partisan efforts is savvy.

The real tell about Cicilline’s strategy, though, is the seeming contradictions between his own bill and that of Representative Jayapal. Cicilline seeks to restrict platforms from behaving in non-discriminatory ways, with the threat of break-up if they don’t, while Jayapal jumps straight to break-up. This strikes me as an anchoring strategy: Jayapal’s approach is both unworkable and undesirable — it leaves the FTC and ultimately the courts as the ultimate arbiter of what is part of a core platform’s offering and what rests on top, and not only does that evolve as technology matures, it also makes it impossible to deliver an experience that is approachable for regular consumers. As I noted above, is a networking stack part of an operating system? Is a browser? Is an App Store? Moreover, Jayapal’s bill, if enacted, makes Cicilline’s bill immaterial: there would be nothing to discriminate against.

That’s why I suspect that Cicilline’s goal is to stake out the most extreme position — the Jayapal bill — with the goal of getting his own bill passed as a compromise, perhaps with Scanlon’s as well. Certainly the tech industry would be right to push back against not only Jayapal’s bill but also Jeffries anti-acquisition bill; I explained in First, Do No Harm why a blanket ban on acquisitions would be so destructive to the Silicon Valley ecosystem and consumer welfare.

Platforms and Integration

That is also why I gave the most detailed overview of Cicilline’s bill: if anything passes Congress this is likely to be a starting point, and it has a lot of compelling points. What is notable is that while there are a couple of provisions clearly targeted at Google Search, the company most clearly impacted is Apple and iOS (and Android). I think this is appropriate: as I have argued repeatedly on Stratechery, including in A Framework for Regulating Competition on the Internet, platforms are in more pressing need of regulation than are Aggregators:

This is where the distinction between platforms and Aggregators is critical. Platforms are the most powerful economic and innovation engines in technology: they create the possibility for products that never existed previously, and are the foundation for huge amounts of innovation. It is in the interest of society that there be more and larger platforms, not fewer and smaller.

At the same time, the danger of platform abuse is significantly greater, because users and 3rd-party developers have no other alternative. That means that not only are anticompetitive actions unfair to products that already exist, they also foreclose the creation of an untold number of new products. To that end, regulators should simultaneously encourage the formation of new platforms while ensuring those platforms do not abuse their position.

Regulations on tying, defaults, anti-steering provisions, control of pricing and interoperability, and most of the other parts of Cicilline’s bill are about restricting platforms from exercising the total control entailed by owning the APIs third-parties need to exist; Aggregators, which win by controlling demand, already have built-in pressure release valves given the fact that competition is a URL away.

That’s not to say that Cicilline’s approach doesn’t have its own downsides: the American Innovation and Choice Online Act would make it much more difficult to deliver an integrated product that appeals to customers by being easier-to-use, and make it more difficult to bring new technologies to market if every improvement has to be accessible to everyone on the platform. This is the exact danger I wrote about last week in Integrated Apple and App Store Risk:

One of the central planks of many of those pushing for new laws in this area are significant limitations on the ability of platforms to offer apps and services, or integrate them in any way that advantages their offerings. In this potential world it’s not simply problematic that Apple charges Spotify 30%, or else forces the music streaming service to hope that users figure out how to subscribe on the web, even as Apple Music has a fully integrated sign-up flow and no 30% tax; it is also illegal to incorporate Apple Music into SharePlay or Shared-with-you or Photos, or in the most extreme versions of these proposed laws, even have Apple Music at all. This limitation would apply to basically every WWDC announcement: say good-bye to Quick Note or SharePlay-as-an-exclusive-service, or any number of Apple’s integrated offerings.

I think these sorts of limitations would be disappointing as a user — integration really does often lead to better outcomes sooner — and would be a disaster for Apple. The entire company’s differentiation is predicated on integration, including its ability to abuse its App Store position, and it would be a huge misstep if the inability to resist the latter imperiled the former.

This, more than anything, is why Apple should rethink its approach to the App Store. The deeper the company integrates, the more unfair its arbitrary limits on competing services will be. Isn’t it enough that Spotify will never be as integrated as Apple Music, or that 1Password will not be built-in like Keychain, or that SimpleNote will only ever be in its sandbox while Apple Notes is omnipresent? Apple, by virtue of building the underlying platform, has every advantage in the world when it comes to offering additional apps and services, and the company at its best leverages that advantage to create experiences that users love; in this view demanding 30% and total control of the users of its already diminished competition isn’t simply anticompetitive, it is risking what makes the company unique.

These risks just took a step towards becoming a reality; Apple’s insistence that it not only give its services an advantage but also tax its competitors means that both are at risk.

The other company that deserves opprobrium is Amazon: while I agree that it is silly that Amazon’s private label service is being held to some sort of higher standard than its retail competitors, particularly given the clear consumer benefits from private labels, Brad Stone’s compelling account in Amazon Unbound of how Amazon prioritized revenue over customer satisfaction in search — particularly in terms of advertising, but also its private labels — is an example of where pursuing short term business gains risked long term repercussions.

The End of the Beginning

I am, as a rule, wary of regulation: unintended consequences always loom large, particularly in an industry as dynamic as tech. Then again, tech hasn’t necessarily been that dynamic as of late: the big five companies today are the same big five companies as a decade ago, and change does not appear to be on the horizon. From The End of the Beginning:

What is notable is that the current environment appears to be the logical endpoint of all of these changes: from batch-processing to continuous computing, from a terminal in a different room to a phone in your pocket, from a tape drive to data centers all over the globe. In this view the personal computer/on-premises server era was simply a stepping stone between two ends of a clearly defined range.

The implication of this view should at this point be obvious, even if it feels a tad bit heretical: there may not be a significant paradigm shift on the horizon, nor the associated generational change that goes with it. And, to the extent there are evolutions, it really does seem like the incumbents have insurmountable advantages: the hyperscalers in the cloud are best placed to handle the torrent of data from the Internet of Things, while new I/O devices like augmented reality, wearables, or voice are natural extensions of the phone.

To the extent this is true (and the intrusion of politics may make it less so) it argues for regulation, but of a particular sort: I think it is fruitless for lawmakers to try and create the conditions for direct competitors to Google Search or iOS or AWS. The goal should not be to engender competition with platforms and services that have overwhelming advantages in the current paradigm, but rather to make sure that today’s winners don’t have unfair advantages in owning the future, or restricting what can be built on top of their platforms. That today’s winners haven’t had the grace to compete for said future fairly means they are ultimately responsible that these sort of blunt infringements on their businesses are now a matter of negotiation, not just theory.


  1. I am linking to each of the bills in question; at times my language will be the exact same as the bill in question — they are bills that are appropriately defining what they do — but I am not using quotation marks for the sake of readability 

Integrated Apple and App Store Risk

Apple acquired Dark Sky, the popular weather app and weather API provider, in March of 2020; the Android version was shut down in July, and the API in December. The real storm, though, arrived in yesterday’s WWDC keynote, when Senior Vice President of Software Engineering Craig Federighi spent 49 seconds previewing iOS 15’s new weather app, filled with new features and wrapped in a gorgeous interface featuring real-time weather elements like accumulating snow and bouncing raindrops.

What made these 49 seconds notable is that they came at a developer conference, and yet Apple’s acquisition of Dark Sky and iOS 15’s new weather app are quite clearly focused on obviating 3rd-party weather apps built by the developers WWDC is theoretically for. This isn’t a complete surprise — the public WWDC keynote is focused on consumers, while the afternoon Platforms State of the Union is for developers — but the new Weather App was only the most extreme example of Apple deciding what part of the iPhone user experience was theirs, and what was left for developers.

The Dark Side of Weather Apps

There is another way of thinking about Apple’s new Weather app; in 2019, a year before the Dark Sky acquisition, the city of Los Angeles sued the IBM-owned Weather Company for collecting and selling location information from its popular Weather Channel app; the company eventually settled with an agreement to better disclose that it was leveraging user location data for more than delivering weather reports.

The problem for users is that it is not as if they could turn location data off: unless a user wanted to manually enter their location every time they used a weather app the app would be fairly useless for its intended function — displaying the weather wherever the user was. The challenge for weather app makers, though, is that weather information is a commodity that costs money: app makers had to pay for the data, but that data was open to anyone willing to pay. The result was a race to the bottom, with user privacy as the casualty: AccuWeather was shown to be sharing precise geolocation data with advertisers, as was WeatherBug, Weather Forecast, and World Weather Accurate Radar.

From this perspective Apple deciding to nuke the entire category, not by outlawing weather apps from the App Store, but rather by investing in delivering a superior weather app by default on the iPhone, is less about being anti-developer than it is about being pro-user. Now users can get useful weather information without having to worry that their data is being traded for access to said information — it’s a reason to buy an iPhone.

App Store Controversy

While Stratechery started out extensively covering the App Store and Apple’s relationship to its developers from the moment it launched, the last year has brought the issue to the forefront in a major way: last WWDC Apple had a public clash with Basecamp; faced an antitrust lawsuit from Epic; received a statement of objections from the European Commission over its treatment of third-party music apps, most notably Spotify; saw CEO Tim Cook testify in an industry-wide antitrust hearing; and was dressed down in a hearing specifically focused on App Stores. There were even more stories, but you get the drift.

Unfortunately, as is often the case with major news stories, many folks’ positions hardened into one of two extremes: either Apple was 100% in the wrong, and ought to completely loosen the reins on the App Store, or Apple was being unfairly maligned for profiting from its innovations. I tried to dig out the nuance between these two positions two weeks ago in App Store Arguments, but the example of the iOS 15 weather app, along with the overall tenor of yesterday’s announcements, is a useful one to add more definition to that nuance, and show why Apple ought to change its approach out of self-interest, not just the goodness of its corporate heart.

Apple’s Integrated Announcements

The case of the weather app is, as I noted above, straightforward: the nature of the App Store market, combined with the cost of weather data, left users with poor choices as far as App Store weather apps are concerned (CARROT weather, I would note, is one weather app that does not sell user data; it requires a subscription for ongoing use). Therefore Apple invested money to build out the default weather app and also committed to funding the acquisition of weather data for all iPhone users forever. Similar justifications apply to a bunch of other new features; in the order in which they were announced:

  • FaceTime not only added the ability to send links for scheduled calls, making it an alternative to services like Zoom, it is also adding features competitors can’t.1 Apple can break FaceTime out of its sandbox because it owns the entire widget.
  • Apple also announced SharePlay, allowing users to listen to the same music or watch the same streaming video services while being on a FaceTime call. While Apple did announce a SharePlay API for third-party music and video services to incorporate, there is no similar API for other video-calling services.
  • “Shared-with-you” surfaces content shared in Messages in the relevant Apple app, whether that be Photos, Apple Music, Apple News, Safari, Apple Podcasts, or Apple TV.
    Apple's slide showing which apps can participate in "Shared-with-you"
    Apple’s slide showing which apps can participate in “Shared-with-you”

    It is a deep level of integration that is only possible if you control all of the pieces involved.

  • Focus lets you reorganize everything from your home screen to your notifications to fit your current context, from working to relaxing to exercising; naturally, it syncs across all of your Apple devices.
  • Intelligence and Spotlight understand and bring together not just textual information but also image-based information, and combines them with Apple services like Maps and Siri.
  • Photos Memories is integrated with Apple Music to provide a soundtrack to its auto-generated photo montages.
  • Wallet is expanding from credit cards, transit cards, and previously-announced car keys to home keys, hotel keys, and even ID cards. All of these are stored in the secure element on Apple’s own chips.
  • AirPods have a much deeper integration with Siri, which can now initiate conversations, not just respond to them, and are expanding their spatial audio capabilities from iOS devices to Apple TV.
  • Quick Note, first demoed on the iPad, makes Apple Notes into a system-wide note-taking service that is available within other Apple apps, and, naturally, syncs across Apple devices; Apple Translate is also available as a system-wide service across Apple devices.

The integration of these features across everything Apple sells was emphasized by Apple’s introduction of the next version of macOS towards the end of the keynote: beyond a truly puzzling re-design of Safari, there really wasn’t much to demo, because Apple had announced all of macOS’ new features in the context of other devices.

One could make the case that nearly all of these features, like the new weather app, were bad for developers:

  • FaceTime now has system-level advantages over Zoom, Teams, and other video-conferencing services.
  • Messages now has special tie-ins into system-default apps like Photos and Safari; those apps, like Apple Music, have special tie-ins into the default messaging service.
  • Apple Maps and Siri are tied into Intelligence and Spotlight in a way that Google Maps and Alexa can not.
  • Photos Memories doesn’t have an option to use Spotify.
  • Apple limits access to both NFC and the secure element.
  • Google Assistant doesn’t have special access to AirPods, nor do non-Apple devices.
  • 3rd-party note-taking apps or translation services can only operate in their sandbox, not across the entire system.

At the same time, there are real user benefits to these decisions:

  • The foundation of iOS security is its sandboxed architecture; the fact that an app can’t touch anything else on the system is not only a win for users, but also developers broadly, as it was an essential elements in re-invigorating the market for apps after the mess that was Windows malware a decade ago.
  • While API-driven interconnections offer the most power and flexibility in the long run, it takes a long-time to get it right, and, more importantly, secure; by controlling both sides of an integration, like those between Messaging and the “Shared-with-you” suite of apps, Apple can focus on a seamless user experience that delivers on useful capability sooner and in a more intuitive way than it might have otherwise (and, over time, perhaps open up an API to 3rd-parties).
  • Direct access to hardware like NFC and the secure element are more straightforward from an API-perspective, but given the security implications of both you can understand why users might prefer the confidence from knowing that only Apple leverages either one.

That’s not to say that Apple itself doesn’t benefit from these integrations: not only do they drive deeper iPhone lock-in, many of these integrations tie into Apple’s subscription offerings. It’s a mistake, though, to focus solely on the direct financial upside.

The Integration Advantage

John Gruber analogized iOS to a theme park on Daring Fireball:

Good column (and video) from Joanna Stern on Apple’s “walled garden”. The people who use the term “walled garden” in this context typically do so as a pejorative. But that’s not right. Literal walled gardens can be very nice — and the walls and gates can be what makes them nice. That’s been a recurring theme in the testimony from Apple executives in the Epic trial. Asked about rules and limits on iOS that Epic presents as nefarious — nothing but tricks to lock users in — Apple witnesses typically responded by presenting them as features. That iOS is wildly popular not despite the “walls”, but because of them…

Better than “walled garden”, I like the comparison to theme parks. People love theme parks. Not everyone, of course, but a lot of people. They’re fun, safe, and deliver a designed experience. They’re also expensive, and the food, to put it kindly, generally sucks. Public parks are great too — in very different ways. We should have great public parks, and we should have great open computing platforms. But not every park should necessarily be public, and not every closed computing platform would be better off open.

I for one prefer open computing platforms; part of the implication of being a bicycle of the mind is that you can efficiently travel anywhere, and I am frustrated whenever I run into the training wheels and guide rails inherent in iOS. At the same time, there is another kind of freedom that comes from knowing that you won’t fall down, or end up somewhere you never wished to go; Apple absolutely grants that kind of freedom to users who take advantage of their devices to do more than they ever could on a more open platform, for fear of screwing up, if nothing else.

I also enjoy the advantages that come from Apple’s deep level of integration, both in terms of individual devices and also across their ecosystem. To take one small example, AirDrop is an essential part of my workflow for writing Stratechery, and, despite my hesitance about using any platform-specific app with inscrutable data structures for permanent data, the new Quick Note feature has me seriously considering a switch to Apple Notes.2 Yes innovation springs from openness and a philosophy of letting a thousand flowers bloom, but it can also come from control and the ability to integrate across non-obvious interfaces. I wrote in 2013’s What Clayton Christensen Got Wrong:

The issue I have with [the traditional] analysis of vertical integration — and this is exactly what I was taught at business school — is that the only considered costs are financial. But there are other, more difficult to quantify costs. Modularization incurs costs in the design and experience of using products that cannot be overcome, yet cannot be measured. Business buyers — and the analysts who study them — simply ignore them, but consumers don’t. Some consumers inherently know and value quality, look-and-feel, and attention to detail, and are willing to pay a premium that far exceeds the financial costs of being vertically integrated.

If you were to boil Apple’s philosophy and attractiveness to customers to one word, that word would be “integration.” And guess what? First party integration is bad for third-party developers — everything is a tradeoff.

Greed and Risk

This is where the nuance I discussed in App Store Arguments becomes much more black-and-white. Yes, Apple created the iPhone and the App Store and, under current U.S. antitrust doctrine, almost certainly has the right to impose whatever taxes it wishes on third parties, including 30% on purchases and the first year of subscriptions, and completely cutting off developers from their customers. Antitrust law, though, while governed by Supreme Court precedent, is not a matter of constitutionality: it stems from laws passed by Congress, and it can be changed by new laws passed by Congress.

One of the central planks of many of those pushing for new laws in this area are significant limitations on the ability of platforms to offer apps and services, or integrate them in any way that advantages their offerings. In this potential world it’s not simply problematic that Apple charges Spotify 30%, or else forces the music streaming service to hope that users figure out how to subscribe on the web, even as Apple Music has a fully integrated sign-up flow and no 30% tax; it is also illegal to incorporate Apple Music into SharePlay or Shared-with-you or Photos, or in the most extreme versions of these proposed laws, even have Apple Music at all. This limitation would apply to basically every WWDC announcement: say good-bye to Quick Note or SharePlay-as-an-exclusive-service, or any number of Apple’s integrated offerings.

I think these sorts of limitations would be disappointing as a user — integration really does often lead to better outcomes sooner — and would be a disaster for Apple. The entire company’s differentiation is predicated on integration, including its ability to abuse its App Store position, and it would be a huge misstep if the inability to resist the latter imperiled the former.

This, more than anything, is why Apple should rethink its approach to the App Store. The deeper the company integrates, the more unfair its arbitrary limits on competing services will be. Isn’t it enough that Spotify will never be as integrated as Apple Music, or that 1Password will not be built-in like Keychain, or that SimpleNote will only ever be in its sandbox while Apple Notes is omnipresent? Apple, by virtue of building the underlying platform, has every advantage in the world when it comes to offering additional apps and services, and the company at its best leverages that advantage to create experiences that users love; in this view demanding 30% and total control of the users of its already diminished competition isn’t simply anticompetitive, it is risking what makes the company unique.

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


  1. You can share the screen of an iOS device via your computer on alternative services, or via hacky work-arounds

  2. At least there is a web version 

Passport

Seven years ago, when I initially launched the paid Daily Update, there weren’t really any tools designed for independent subscription businesses; my solution has incorporated a number of disparate services tied together, and while new companies have been formed around both paid newsletters and paid podcasts, no one has created a service for a site like Stratechery. So I decided to build it. It’s called Passport.

 

Passport is the new back-end for Stratechery

 

Stratechery, in a literal sense, is a website; you can choose to receive content from that website via email and, as of a year ago, podcast. Stratechery in a figurative sense, though, is my home on the Internet, a spot on the infinite digital frontier that is mine. This speaks to the first reason to build my own solution: while WordPress, the CMS that underpins Stratechery, is open source, and thus something I can control, the various services I used to manage subscriptions and send email were not; I wanted to rectify that.

The second reason to build Passport is to provide a better experience for my subscribers. One of the downsides of relying on a menagerie of different services is that there were both more rough edges exposed to users, and also an inability to provide more personalized offerings. Passport is an improvement on both fronts.

The third reason to build Passport is to expand my capabilities as a creator. It is valuable to make it easy to get started (Passport has a learning curve) but there is room for more powerful tools that let creators do more, from the ability to fully customize a website to a powerful templating system to single sign-on capabilities. Passport is enterprise software for creators.

Integrated Communications via Open Protocols

While Stratechery started as only a blog, the reason why it became strongly associated with newsletters is that folks realized that your email inbox was the only feed users checked daily that wasn’t a closed garden. Sending out posts via email meant that subscribers didn’t need to remember to visit your site; publishers can meet their readers where they are.

Last year Stratechery expanded on this concept with the Stratechery podcast; while the content was the same as the web or email, the medium — spoken word — was not, which meant that Stratechery could fit into that many more places in a subscriber’s day. Podcasts, like email, were also built on an open standard, which meant reaching users on their terms, not a gatekeeper’s terms.

However, as the world becomes increasingly mobile-centric, more and more communication happens via messaging; notifications are the new inbox. And, while many of these notifications come from closed messaging services, there remains one open option: SMS. While SMS isn’t free to use,1 it does not have any gatekeepers, which makes it an attractive option for the independent creator.

Passport integrates all of these open communications channels into one service, providing a seamless experience for both me as publisher and my readers. Start with the member app, where subscribers can decide which types of content they wish to receive in which medium:

Members can choose what content to receive where

In this case the subscriber has chosen to be notified immediately about Weekly Articles and receive Daily Updates via email, unless they are an interview, in which case the subscriber prefers to listen via podcast (this subscriber’s podcast feed will only contain Interviews, not other episodes). As for the Weekly Article, the link in the text message will load the Weekly Article directly:2

Get notifications about Stratechery articles via SMS

Weekly Articles are of course free to access; a more challenging situation is when the subscriber wants to access subscriber-only content. For example, the subscriber may be listening to a Daily Update Interview, and wish to read the transcript; they can simply go to the show notes, click the link, and view the post on Stratechery:

Links from your feed or emails always log you in automatically

Notice that the user is viewing subscriber-only content within their podcast player, despite the fact they never previously logged-in within that webview; that is because every link is unique to that user, making the integration with the Stratechery website completely seamless. This capability also means that every communication, from podcasts to RSS to email, can be customized to the user:

Passport customizes content to Stratechery subscribers

One of the tenets of subscription-based businesses is that you want to have a one-to-one connection with your users; the reality of Stratechery previously is that I had a relatively dumb paywall, was sending out undifferentiated email blasts, and had a one-size-fits-all podcast. Passport enables true one-to-one communication at scale, across every open protocol available to creators.

Sovereign Creators and Visas

There are two implications to the name “Passport”: first, while sovereign countries issue physical passports, sovereign creators (whether they be individuals or publications) issue online passports to website and communications channels that they own. Secondly, though, is the concept of visas: in the real world visas let you into other countries; in the online world, visas give you access to other sites and services. Stratechery is launching with three real-life examples:

Passport-to-Passport

A Passport-powered site like Stratechery can sell subscriptions to a different Passport-powered site like Dithering (with permission, of course). For example:

  • Dithering and Stratechery have agreed that Stratechery subscribers can “Add-on” Dithering for $3/month, instead of the normal $5/month
  • Once the add-on is purchased, the subscriber goes to Dithering’s Passport to get their personalized feed; Dithering controls the content relationship
  • However, if the user tries to manage their subscription at Dithering, they are sent back to Stratechery, which owns the billing relationship

How Dithering and Stratechery split the content and billing relationship between a shared customer

These interactions are peer-to-peer, and under the complete control of the sovereign Passport owners.3

OpenID and Discourse

Passport can serve as a single sign-on authenticator for any service that supports OpenID, like, for example, the Stratechery forum, which is based on Discourse. When you want to visit the forum at forum.stratechery.com, you will be presented with a Stratechery Passport login screen; enter your credentials and you are good to go:

Single sign-on with Passport

This required zero interaction with Discourse’s developers; it just worked.

OAuth and Spotify

In April Spotify announced the Open Access Platform:

Are you a creator or publisher who has subscribers elsewhere? We’re also working on technology that will let your listeners hear your content on Spotify using your existing login system. This gives creators with existing subscriber bases the option to deliver paid content to their existing paid audiences using Spotify, retaining direct control over the relationship.

I wrote at the time in Spotify’s Surprise:

For full disclosure, I have been briefed on the Open Access Platform, and Spotify has addressed all of my concerns; no, they won’t support arbitrary RSS feeds, but instead another open technology — OAuth. Some time soon Stratechery and Dithering subscribers will be able to link their subscriptions to their Spotify accounts, and Spotify isn’t going to charge a dime — they will be my customers from email address to credit card. Spotify Chief R&D Officer Gustav Söderström told me, “Having all of audio on Spotify means meeting independent creators on their terms, not ours.”

That “some time soon” is today: you can now select Spotify from your Delivery Preferences page, from whence you will be able to link your Stratechery account to your Spotify account, and listen to the Stratechery Podcast in Spotify (everyone can listen to the free Weekly Articles):4

Listen to Stratechery (and Dithering) on Spotify

In the interest of even fuller disclosure, Spotify first proposed an OAuth-based solution to me in February after the company’s Speak-On event; I had in fact already been working on the OAuth-based Passport for multiple months, so it was a very fortuitous circumstance that we both independently reached the same conclusion about how Aggregators could work with sovereign creators on a technical level. I am hopeful that other Aggregators will take the same enlightened self-interest approach to working with sovereign creators.

Passport’s Future

The other thing that makes Passport distinct from other subscription management services is that Passport isn’t a subscription manager at all; Stratechery happens to be powered by Stripe Billing, but Passport in principle can work with any subscription management service (that is why, for example, one Passport can create visas for another Passport). Passport could work with in-app purchasing, a publication’s existing subscription management system, or even other subscription management services. Remember, Passport’s integration is between member management and open communications tools; everything else attaches via API (including the optional CMS).

This also means that Passport offers a full-fledged experience for free members; you don’t have to be a subscription-based site to use Passport, or if you are (like Stratechery), you can still offer a great experience to folks who haven’t yet pulled out their credit card. And, if free members do decide to subscribe, they don’t have to re-add their feeds or update their contact information; they will instantly start receiving members-only content.

This also means I can offer free-content beyond what is available by default; for example, if you want to stay in the loop about Passport, you can now add a free Passport plan to your membership:

Become a free Stratechery member to get updates about Passport

Sign up for a Stratechery account, then add the Passport plan; this will be the best place to stay abreast of Passport development, including my hope to release an open-source project to ensure that every creator has the same option for total independence that I have now achieved.5

Alan Kay famously said, “People who are really serious about software should make their own hardware”; my variation is that creators who are really serious about building a career on the Internet should own their own software. I can now speak from experience when I say it’s one of the best feelings in the world.

I once again want to thank Jon Thies and Rob Rodriguez for building Passport with me, and to Daman Rangoola for his untold number of contributions to every aspect of both Stratechery and Passport.


  1. and thus not available to free subscribers 

  2. Yes, a link shortener is in 1.1 😊 

  3. Stratechery and Dithering are currently cheating and sharing a Stripe account, but that is because that was the only way to support bundling with my previous service; in the very near future this will work across distinct Stripe accounts 

  4. The ‘Email’ field in this screenshot, by the way, is independent of the ‘Account Email’ field; now you can easily send Stratechery to your Kindle, read-later service, or manage an account for someone else. 

  5. And remember, you can turn off all of the Stratechery content if you want to! 

App Store Arguments

Arguments in Epic Games, Inc. v. Apple Inc. wrapped up yesterday; Judge Yvonne Gonzales Rogers noted she had thousands of documents to pore over, but hoped to issue a decision within the next few months. I think there is a strong chance that Apple prevails, for reasons I’ll explain below, but that doesn’t mean the trial has been waste of time: it has cast into stark relief the different arguments that pertain to the App Store, and not all of them have to do with the law.

The Legal Argument

Apple came into the trial with a strong hand rooted in Supreme Court precedent.1

First, while it is possible to define the App Store for iPhones as a distinct aftermarket (see Kodak v. Image Technical Services), appellate courts have significantly narrowed that decision to limit its application to situations where the company selling the product that leads to an aftermarket is only barred from changing the rules after-the-fact to foreclose competition in the aftermarket; if the rules foreclosing competition are consistent, however, then there is no harm, because customers know what they are getting into. In the case of the iPhone, this means that Apple can control the market for iPhone apps, because customers already know that Apple controls the App market; if they don’t like it they can buy a different phone. This is why Apple spent time in the trial establishing that its control of the App Store was in fact a selling point of the iPhone, and a reason why customers chose to enter iOS’s more restrictive ecosystem.

Second, Apple also made the case that there is a competitive market for developers. This was an especially effective line of reasoning with regard to Fortnite, which makes more money from other platforms than it does from iOS; moreover, those platforms have rules that are similar to iOS, including exclusive payment platforms, no-steering provisions, and 30% commissions.

The most important case for Apple’s defense, though, is 2004’s Verizon v. Trinko, which established and/or reiterated several important precedents that support Apple’s position, even if Apple were held to be a monopolist.

First, a monopolist has a right to monetize its intellectual property; the opinion states:

The mere possession of monopoly power, and the concomitant charging of monopoly prices, is not only not unlawful; it is an important element of the free-market system. The opportunity to charge monopoly prices — at least for a short period — is what attracts “business acumen” in the first place; it induces risk taking that produces innovation and economic growth. To safeguard the incentive to innovate, the possession of monopoly power will not be found unlawful unless it is accompanied by an element of anticompetitive conduct.

This is why CEO Tim Cook in his testimony kept insisting that Apple had a right to monetize its intellectual property, and why the company has emphasized the cost of not simply running the App Store but also in developing APIs and developer tooling.2

Second, a monopolist has no duty to deal with any other company; the opinion states:

Firms may acquire monopoly power by establishing an infrastructure that renders them uniquely suited to serve their customers. Compelling such firms to share the source of their advantage is in some tension with the underlying purpose of antitrust law, since it may lessen the incentive for the monopolist, the rival, or both to invest in those economically beneficial facilities. Enforced sharing also requires antitrust courts to act as central planners, identifying the proper price, quantity, and other terms of dealing — a role for which they are ill suited. Moreover, compelling negotiation between competitors may facilitate the supreme evil of antitrust: collusion. Thus, as a general matter, the Sherman Act “does not restrict the long recognized right of [a] trader or manufacturer engaged in an entirely private business, freely to exercise his own independent discretion as to parties with whom he will deal.”

What this means for this case is that Apple has no duty to provide access to those APIs and development tools to companies that do not abide by its terms. There is a very limited exception to this provision (see Aspen Skiing v. Aspen Highlands Skiing), but like Kodak, it only applies to situations where the monopolist changes the rules; Epic, on the other hand, has always operated under the same set of in-app purchase rules.3

Third, the Court stressed that judges should carefully weigh the costs of enforcement with the benefits of an injunction:

Against the slight benefits of antitrust intervention here, we must weigh a realistic assessment of its costs. Under the best of circumstances, applying the requirements of §2 “can be difficult” because “the means of illicit exclusion, like the means of legitimate competition, are myriad”…Mistaken inferences and the resulting false condemnations “are especially costly, because they chill the very conduct the antitrust laws are designed to protect.” The cost of false positives counsels against an undue expansion of §2 liability. One false-positive risk is that an incumbent LEC’s failure to provide a service with sufficient alacrity might have nothing to do with exclusion. Allegations of violations of §251(c)(3) duties are difficult for antitrust courts to evaluate, not only because they are highly technical, but also because they are likely to be extremely numerous, given the incessant, complex, and constantly changing interaction of competitive and incumbent LECs implementing the sharing and interconnection obligations. Amici States have filed a brief asserting that competitive LECs are threatened with “death by a thousand cuts,” the identification of which would surely be a daunting task for a generalist antitrust court. Judicial oversight under the Sherman Act would seem destined to distort investment and lead to a new layer of interminable litigation, atop the variety of litigation routes already available to and actively pursued by competitive
LECs.

All of that mumbo-jumbo in the second part of that paragraph is referring to the specifics of the 1996 Communications Act and the complexities of Verizon’s obligations as a local exchange carrier (LEC). In another sense, though, the mumbo-jumbo is the point: the Court’s argument is that judges are ill-equipped to understand technical specifics and weigh important trade-offs, particularly absent any egregious anti-competitive behavior (as defined by the Court).

The Pragmatic Argument

This matters because the reality is that the App Store is complicated. One of the arguments that Epic raised in the case is that there are scams in the App Store; Epic’s argument is that effectiveness-at-rooting-out-scams should be a plane of competition, while Apple pushed out a post arguing that the App Store in fact stopped many more scams than it allowed, and that the fact there is only one way to get apps on your phone is a feature, not a bug.

As John Gruber noted, the sudden appearance of this post suggested that Apple felt it was losing the PR war:

There’s nothing curious about the timing of this post — it’s in response to some embarrassing stories about fraud apps in the App Store, revealed through discovery in the Epic v. Apple trial, and through the news in recent weeks. The fact that Apple would post this now is pretty telling — to me at least — about how they see the trial going. I think Apple clearly sees itself on solid ground legally, and their biggest concern is this relatively minor public relations issue around scam apps continuing to slip through the App Store reviewing process.

Another reason to think this is true is that I actually think that Apple underplayed their case: there are a whole category of transactions that are not explicit scams of the types documented in that post, but which are clearly designed to remove customers from their money as efficiently as possible. Now Apple’s incentives here are not pure: the company does make 30% of these purchases. But Epic is compromised as well, particularly once you realize that most of these problematic apps are games.

I’m not, to be clear, arguing that Fortnite is a problem; I’m sure Epic would be the first to say that they have a reputation to uphold — as, of course, would Apple. Not all developers, though, would be so scrupulous, and a world where any app could collect credit card information directly is one where it seems more likely than not that consumers will find themselves losing much more money than they anticipated, with no obvious recourse to get it back or make it stop.

This is where the malware discussion in the trial was relevant; Apple argued that iOS had less of it, while Epic attributed that to iOS’s sandbox architecture that keeps apps isolated from each other. The other malware takeaway, though, is the fact that it massively suppressed the market for third-party applications on Windows. Consumers didn’t suddenly get smart about apps, thanks to the pressure of competition; they simply stopped downloading and installing apps at all. One of the great triumphs of the App Store is the fact that it made consumers feel safe and secure about installing apps, dramatically expanding the market for developers — including Epic.

At the same time, there is a practical cost to Apple’s approach: there are entire classes of apps that for all practical purposes can’t exist on the iPhone, particularly those that entail paying licensing fees to 3rd parties on a percentage-of-total-sales basis. Apple, in one of the more damning emails to emerge over the last year, admitted as such:

Steve Jobs stating that iBooks will be the only viable bookstore on the iPhone

This does, I would note, put Apple’s antitrust conviction in the ebooks case in considerably more dubious light: Apple was trying to shift the industry away from a wholesale model to an agency model, which is the exact sort of model that doesn’t work with the App Store. That the company was offering its own alternative — iBooks — makes it worse, just as the introduction of Apple Music made the application of App Store rules to Spotify particularly problematic.

What is also worth acknowledging, though, are the kinds of businesses that never get off the ground. During the pandemic, for example, Apple originally sought to take a cut of person-to-person businesses like counselors and trainers; the company did change the rules to allow one-to-one interactions to be paid for via an alternative payment method, but still demands a cut of one-to-many offerings like classes. There is also the impact on the burgeoning creator economy; I tweeted over the weekend:

Ben's tweet about how little a creator makes with Twitter's new ticket feature

In this world you don’t need 1,000 true fans to make a living; you need 1,786 — 536 fans to pay Apple, 253 fans to pay Twitter, and only then the 1,000 that make it possible to create something new. It is inevitable that some number of businesses never get started, because of this deadweight loss.

The Duopoly Argument

That tweet, I will admit, wasn’t entirely fair. While I noted that Twitter earned its cut by creating a market where one did not previously exist, the same argument can absolutely be made about Apple. As I noted above, Apple not only created the iPhone, it also created a willingness to download and experiment and pay that vastly expanded the market for developers. If Twitter deserves a cut, why not Apple? But then again, how far does it go?

Ben asking why AT&T and Verizon shouldn't get 30%

Where does the “made something previously impossible possible” chain of causation and entitlement end? With the phone? With carriers? With TSMC? Obviously Apple believes it ends with the iPhone, but it’s worth exploring why that isn’t simply a wish but a reality; after all, the carriers actually did take a share of all transactions on their networks 14 years ago. The company that changed the status quo was Apple; I explained How Apple Creates Leverage in 2014:

While Apple in 2006 (in the runup to the iPhone) was in a much stronger position than 2003, they were still much smaller ($60.6 billion market cap) than AT&T ($102.3 billion) or Verizon ($93.8 billion) on an individual basis, much less the carrier industry as a whole. More importantly, carriers weren’t facing a collective existential threat like piracy, which significantly increased their BATNA [Best Alternative to a Negotiated Agreement] relative to the music labels.

The music labels, though, benefitted from a relatively low elasticity of substitution: if I wanted one particular band that wasn’t on the iTunes Music Store, I wouldn’t be easily satisfied by the fact another band happened to be available. The carriers, on the other hand, largely offered the same service: voice, SMS, and data, all of which was interoperable. This increased elasticity of substitution gave Apple an opportunity to pursue a divide-and-conquer strategy: they just needed one carrier.

Apple reportedly started iPhone negotiations with Verizon, but it turned out that Verizon was already kicking AT&T’s (then Cingular’s) butt through aggressive investment and technology choices, resulting in increasing subscriber numbers largely at AT&T’s expense. Verizon saw no need to change their strategy, which included strong branding and total control over the experience on phones on their network. AT&T, meanwhile, was on the opposite side of the coin: they were losing, and that in turn had a significant effect on their BATNA – they were a lot more willing to compromise when it came to branding and the user experience, and so the iPhone launched on AT&T to Apple’s specifications.

That is when Apple’s user experience advantage and corresponding customer loyalty took over: for the first time ever customers were willing to endure the hassle and expense of changing phone carriers just so they could have access to a specific device. Over the next several years Verizon began to bleed customers to AT&T even though their service levels were not only better, but actually widening the gap thanks to the iPhone’s impact on AT&T. Four years after launch the iPhone did finally arrive on Verizon with the same lack of carrier branding and control over the user experience; in other words, Verizon eventually accepted the exact same deal they rejected in 2006 because the loyalty of Apple customers gave them no choice.

Apple followed the same playbook in country after country: insistence on total control (and over time, significant marketing investments and a guaranteed number of units sold) with a willingness to launch on second or third-place carriers if necessary. Probably the starkest example of the success of this strategy was in Japan. Softbank was in a distant third place in the Japanese market when they began selling the iPhone in 2008; finally after four years second-place KDDI added the iPhone, but only after Softbank had increased its subscriber base from 19 million to 30 million. NTT DoCoMo, long the dominant carrier and a pioneer in carrier-branded services finally caved last year after seeing its share of the market slide from 52% in 2008 to 46%.

Forgive the long excerpt, but the specifics of what happened between Apple and the carriers is essential to understanding what makes the App Store question so challenging. What is critical to note is that Apple was able to break the carrier’s hold on what happened on their networks because competition (1) existed at the carrier level and (2) occurred in multiple markets. That meant that Apple had a place to leverage its ability to make something better.

The App Store market, on the other hand, is a worldwide duopoly, which dramatically reduces the point of leverage for any one app. Suppose Twitter wanted to push back on Apple’s policies, and go exclusively to Android; that would entail giving up around 20% of the market worldwide, and about 50% of the market in the U.S. It’s simply not viable to do a divide-and-conquer approach when there are only two alternatives in a worldwide market. That is why Apple and Google mostly copy each other’s policies, comfortable in the knowledge that no one app really matters.

I suppose Twitter could make its own phone, just as Apple could have built its own phone carrier, but given the essentialness of an App ecosystem, the former is actually a far more intractable challenge than the latter. One app may not matter to an ecosystem, but as a collective nothing matters more.

The Moral Argument

This gets at the part of this case that is, to be perfectly honest, kind of infuriating. Back in 2009 Apple came up with a memorable campaign for the iPhone:

I admit it — the first tweet above was wrong. Apple absolutely did a tremendous amount for developers. It invented the iPhone, it brought the concept of an App Store to the mass market, and it has iterated on both. And yes, it spends a lot of money on APIs and developer tools.

What the company no longer admits, though, is that developers did a lot for Apple too. They made the iPhone far more powerful and useful than Apple ever would have on its own, they pushed the limits on performance so that customers had reasons to upgrade, and even when Android came along iPhone developers never abandoned the platform. Sure, they had good economic reasons for their actions, but that’s the point: Apple had good economic reasons for building out all of those APIs and developer tools as well.

Apple said as much when the App Store first launched; Steve Jobs said in 2008 that “Our purpose in the App Store is to add value to the iPhone”, even as he admitted that “the App Store is much larger than we ever imagined.” When Apple introduced the iPhone SDK Jobs had analogized the company’s 70/30 split to iTunes, but it was already clear a few months later that the opportunity was far larger than music.

This worried longtime Apple executive Phil Schiller; in one of the most striking emails to emerge from the trial, he suggested that Apple might consider voluntarily capping its App Store profit to $1 billion, which was far more than the break-even amount Jobs hoped for at launch.

Slide from Apple v Epic

Schiller argued that Apple ought to make such a move from “a position of strength rather than weakness”; one can certainly make the argument that he was gravely mistaken, given that Apple makes somewhere in the neighborhood of $15 billion from the App Store, and that, for all of the reasons I just explained, is as secure in its competitive position as it has ever been.

And yet, it’s worth remembering that Apple did $294 billion in sales last year; the App Store is not and never will be its main business. Is it strong to continue to tarnish the customer experience with popular apps, its reputation with developers, and provoke criticism from Congress simply because it can? How much might it have been worth to remember that while Apple will always have the leverage with individual developers, developers as a collective — along with creators and authors and musicians and everyone else who wants to build a business on the iPhone — are exactly what makes the iPhone so compelling?

The Anti-Steering Argument

The argument that Judge Gonzales Rogers seemed the most interested in pursuing was one that Epic de-emphasized: Apple’s anti-steering provisions which prevent an app from telling a customer that they can go elsewhere to make a purchase. Apple’s argument, in this case presented by Cook, goes like this:

Tim Cook's Best Buy argument

This analogy doesn’t work for all kinds of reasons; Apple’s ban is like Best Buy not allowing products in the store to have a website listed in the instruction manual that happens to sell the same products. In fact, as Nilay Patel noted, Apple does exactly this!

Nilay Patel refutes the Best Buy argument

The point of this Article, though, is not necessarily to refute arguments, but rather to highlight them, and for me this was the most illuminating part of this case. The only way that this analogy makes sense is if Apple believes that it owns every app on the iPhone, or, to be more precise, that the iPhone is the store, and apps in the store can never leave.

Judge Gonzales Rogers, meanwhile, is not the only one that finds Apple’s entitlement to apps problematic; the European Commission specifically cited the App Store anti-steering provision in its Statement of Objections about Apple’s approach to competition “in the market for the distribution of music streaming apps through its App Store”. That position of strength is starting to weaken.


After the European Commission’s announcement, Benedict Evans wrote in Resetting the App Store:

We’ve been arguing about this for a decade, but now something is going to change, partly because of Epic’s lawsuit (which it might or might not win) but much more importantly because the EU has a whole set of competition investigations into the sandbox, the store and the payment system, and is highly unlikely to accept the status quo. When Apple launched the store in July 2008 it had only sold 6m iPhones ever, but now a billion people have one, and competition laws apply, whether you like it or not. Epic might lose, but Spotify will win. What will that mean, though? What rules will change, and how, and what will that mean for anyone who isn’t an Apple or Spotify shareholder?…

It’s possible to believe that the sandboxed App Store model has been a hugely good thing, and also that Apple has too often made the wrong decisions in running it, and also that unwinding those decisions while preserving the underlying model won’t actually change much for many companies or consumers, and won’t really be a significant structural change in how tech works.

What Evans highlights is that all of these arguments about the App Store are good ones. Apple has good ones, Epic has good ones, Spotify has good ones, the European Commission has good ones, and I’d like to think I have good ones as well. As the Supreme Court has noted, though, a realm with lots of complexity and lots of good arguments about every single trade-off is one that is extremely poorly suited to judicial oversight. Congress is certainly an option — there is a utility sort of argument to be made about the App Store — but that comes with massive risks, given the relative frequency of changes in the law relative to changes in technology (the Epic case is being argued under a law passed 121 years ago).

What I wish would happen — and yes, I know this is naive and stupid and probably fruitless — is that Apple would just give the slightest bit of ground. Yes, the company has the right to earn a profit from its IP, and yes, it created the market that developers want to take advantage of, and yes, the new generation of creators experimenting with new kinds of monetization only make sense in an iPhone world, but must Apple claim it all?

Let developers own their apps, including telling users about their websites, and let creatives build relationships with their fans instead of intermediating everything.4 And, for what it’s worth, continue controlling games: I do think the App Store is a safer model, particularly for kids, and the fact of the matter is that consoles have the same rules. The entire economy, though, is more than a game, and the real position of strength is unlocking the full potential of the iPhone ecosystem, instead of demanding every dime, deadweight loss be damned.


  1. Obvious caveat: I am not a lawyer, although I have consulted with both an antitrust lawyer and an antitrust economist about legal precedents surround the App Store; this is also about U.S. law only 

  2. There is a question as to whether Apple’s approach is the least restrictive way to achieve legitimate business ends; this is a very difficult argument to win in court, though, as any proposed solution has to be better in all regards, including appropriately compensating the IP holder. 

  3. Some “reader” apps like Kindle did have the rules changed on them — Apple used to let them link out to the web for payments — but that was years ago before the iPhone was as dominant as it is today; parental control apps may have a more compelling case. 

  4. Customers, of course, could decline; that would be a reason for developers and creatives to opt into Apple’s model