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” 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 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.


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 


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:


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, 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

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 

Distribution and Demand

Felix Salmon asked a question on Twitter:

Felix Salmon's question about AT&T and Amazon

While Salmon’s question was driven by the news that AT&T would spin out WarnerMedia and merge it with Discovery, under Discovery’s management, it was also prescient given a report in The Information a few hours later that Amazon is considering buying MGM.

It remains to be seen if Amazon will actually follow through with a purchase, and even longer to know whether or not it was the right play; there are reasonable arguments both for and against. What has always been clear, though, is that AT&T’s foray into media was a bad idea that made zero strategic sense.

Being open to Amazon’s purchase of a studio, and opposed to AT&T’s acquisition of a media conglomerate (which I was from the beginning) isn’t based on some sort of bias against old-line firms versus tech firms; rather, it stems from an understanding that the Internet really is different from the analog world.

AT&T and the Economics of Distribution

Distribution is one of the most frequently used words in both tech and media, and in the vast majority of cases it is used wrongly; explaining why the marriage of AT&T and Time Warner was destined for divorce is not one of them. Take it from a legend of the industry, in the Wall Street Journal:

Cable mogul John Malone, a major Discovery shareholder, said that although he believes Time Warner is doing fine, merging content and distribution usually doesn’t make sense. “I think that the technology of connectivity and digital technologies are one focus, and creating content that people get addicted to is another focus,” he said. “And you seldom would find both of those in the same management team.”

Look no further than Jeff Bezos and Amazon to see why Hollywood can be a distraction, but in my estimation the problem of merging content and distribution are much more fundamental.

Start with the latter: distribution, properly understood, entails the build-out of physical infrastructure. Comcast needs to lay cable and fiber; DirecTV, another AT&T misadventure, needs to launch satellites and install dishes; AT&T’s core mobile business requires buying spectrum and installing cell phone towers and base stations. These are not businesses for the faint of heart, given the massive capital costs.

The payoff for this investment, though, is a competitive moat. Comcast, for example, may only compete with satellite for TV service, and the local phone company for Internet access; no other cable company is going to lay competitive cable lines, because Comcast could simply lower prices and drive them out of the market. This isn’t even predatory pricing, because the actual utilization of its infrastructure is effectively free on a marginal basis. Laying cable is expensive, but using it is cheap.

That said, to the extent competition exists, it is quite brutal because it is zero sum; an AT&T customer is not Verizon customer is not a T-Mobile customer. The combination of scarcity in customers and zero marginal cost for incremental usage can lead to price wars, which T-Mobile used over the last decade to take a good amount of share from Verizon and AT&T; perhaps that is why both tried their hand at content.

Differentiation and Commoditization in Content

Verizon’s approach was to get into the commoditized content space, acquiring and eventually merging AOL and Yahoo into a company bizarrely named “Oath”. The problem for Verizon is that Oath had the opposite problem of its core business: digital content requires effectively zero fixed costs to get started, but never-ending marginal costs to produce, which means it had effectively infinite competition for both eyeballs and advertising dollars, and no differentiation in either market.

AT&T, on the other hand, acquired highly differentiated content with its acquisition of Time Warner (which it renamed WarnerMedia). The problem for AT&T is that differentiated content has a business model that is orthogonal to AT&T’s core business. Whereas AT&T competes for customers in a zero sum game, content is best leveraged by reaching as many customers across as many distributors as possible. That means that what would have been best for AT&T’s core business — being the exclusive way to get access to WarnerMedia content, thus giving a reason for customers from Verizon or T-Mobile to switch carriers — would have been value destructive to WarnerMedia, because the cost of producing its differentiated content would have been amortized across fewer customers.

AT&T instead went in the opposite direction: by creating HBO Max, WarnerMedia stopped selling content to the highest bidder and instead started bidding for content itself, which was the worst of all possible worlds, at least in the short run. HBO Max content was limited in reach — it was only available to HBO Max subscribers — which meant that its content was leveraged against an even smaller base than, say, AT&T’s customers. The potential payoff, of course, was a service like Netflix, which reaches everyone everywhere, no matter their carrier or cable provider (which, of course, raises the question as to what strategic benefit would have accrued to AT&T’s core business even in the best case scenario).

This is where it is important to be precise about the meaning of “distribution.” For Netflix, distribution is the Internet, which is to say it is completely commoditized. You can watch Netflix on your phone, on your TV, on your console, on your computer, on your set-top box, basically through any device that has an Internet connection. This distribution isn’t technically free — Netflix has huge bandwidth bills, and if you watch enough of it you may hit bandwidth caps — but from a strategic perspective it might as well be.

In fact, everything that is distributed via the Internet is effectively free. Netflix, Oath, HBO Max, Google, Facebook, Wikipedia, Spotify, YouTube, Stratechery — all are effectively free to access for anyone from anywhere. This is why I get so confused when companies or regulators complain about Google or Facebook controlling distribution; neither company controls the cables or routers or switches that deliver content. They have zero control of distribution. Rather, what those companies control is demand.

Distribution Versus Demand

What are the ways one might read this Article? My subscribers are reading an email, or perhaps an RSS feed, or listening to a podcast. New readers may have had this Article forwarded to them from a friend, followed a link on social media, or searched for an article distinguishing between “Distribution and Demand.”

The sheer scale of the Internet is such that the last two channels have many orders of magnitude more potential readers than the ones I directly control. After all, people use social media to connect to basically everyone on the planet, and post basically anything; a link to my site is one link among an infinite number of other links. It’s the same thing with search: everyone uses search to find information about anything you might think of; the scale of the Internet — thanks in part to the never-ending content creation that characterizes businesses like Oath — is such that there are almost always scads of results for your query.

What makes Google and Facebook so successful is that they are the linchpin upon which these massive markets pivot, in large part because both services increase in functionality with scale: more sites and more links mean better results in Google, which drives increased usage, which provides a feedback function allowing Google to refine its results; similarly, more people and more content mean stronger networks and more engagement on Facebook, which drives increased usage, which provides a feedback function improving the recommendation algorithm.

Both services built monetization engines that perfectly align with and benefit from their core feedback function: Google gives you search ads that are more relevant with more advertisers, and which improve in relevance with more customer clicks; Facebook shows you ads that you are interested in because they are similar to the content you already enjoy, and like Google, more ads mean better ads for the marginal user, which improve in relevance with more customer clicks.

The problem for a company like Oath is that its content was simply grist for Google and Facebook, and to the extent it earned page views, the accompanying ad inventory wasn’t nearly as differentiated as ads sold by Google or Facebook. Oath had distribution — anyone anywhere could access its sites and apps for free — the problem is that it didn’t have demand, from either users or advertisers.

HBO Max, meanwhile, did have demand for its content, but because that content required a subscription to HBO Max, it placed an artificial cap on its distribution to whoever was willing to subscribe. This can work — again, look at Netflix — but it takes billions of dollars, both in actual spending and, just as importantly, in foregone content sales, to pull it off. That may make sense for a startup, but its nigh-on suicidal for a (real) distribution company like AT&T.

Amazon Prime

There is another important difference between a company like Oath and a company like Google: while the former has minimal fixed costs and ongoing marginal costs, the latter has massive fixed costs and minimal marginal costs. Google spends a massive amount of money on both R&D and in capital costs to dot its servers all over the world, and link them together with an expansive private network; Google leverages these costs across the virtuous cycle of users, content suppliers, and advertisers.

Another company that expends massive amount of money on R&D and capital costs is Amazon;1 the company spends billions of dollars on everything from distribution centers to delivery drivers, paying for it with an ever-expanding virtuous cycle of suppliers, customers, and, increasingly, advertisers. Because these costs are fixed Amazon wants to both expand its customer base and also increase its share of wallet with its existing customers; one of the most effective ways to do this is convince customers to subscribe to Prime, which, among other benefits, offers two-day (increasingly one-day) shipping. This encourages shoppers to start their searches for products on Amazon, where they may click on sponsored search results and ultimately buy on Amazon, without even considering alternatives.

This is not, to be clear, because Amazon controls distribution. Other e-commerce sites are, as they say, “only a click away” — Google in particular is eager to direct shoppers to alternatives, which are easily accessed from your phone or computer. Rather, Amazon’s goal is to control demand: its best customers go to Amazon because Amazon has what they need and gets it to them quickly, and because they already paid for shipping with their Prime subscription.

Notice how much different this kind of competition is from that engaged in between true distribution companies: AT&T and Verizon spend a lot of up-front, but the payoff is physical lock-in; Google and Amazon, meanwhile, spend massive amounts of money on fixed costs, but they don’t have any lock-in at all: they win not by limiting customer choice, but by being the top choice in a world where alternatives are easily accessible. At the same time, while a dependency on physical infrastructure limits AT&T and Verizon’s scale, companies like Google, Amazon, and Facebook have free distribution — remember, they’re on the Internet! — which means they can serve anybody.

This is why Amazon’s long-running investment in Prime Video, and potential acquisition of MGM, makes far more strategic sense than AT&T’s gambit ever did. Amazon has to work to win and retain customers on a continual basis, ideally to its Prime subscription service, and bundling differentiated content is a great way to do that. Moreover, Amazon isn’t trying to build a subscription service from scratch, thus drastically limiting its leverage on that content; Prime has 147 million members in the United States, and 200 million worldwide, and none of those customers are making a zero-sum choice between Prime and, say, Netflix. After all, distribution is free.

Aggregators and Platforms

You can probably guess my vote in Salmon’s poll:

I voted that AT&T was being stupid and Amazon was being smart

I do get the argument that Prime Video is a waste of money for Amazon; Brad Stone notes in his new book Amazon Unbound that “there was little evidence of a connection between viewing and purchasing behavior” and that “any correlation was also obfuscated by the fact that Prime was growing rapidly on its own.” I have no beef with people who voted “No” on both — what is important is that we all agree that AT&T’s approach didn’t make any sense at all.

This is why getting definitions right is so important: if you conflate controlling distribution with controlling demand, you are liable to waste billions of dollars on acquisitions that make no sense, or, in the case of regulators, spend years pursuing court actions against companies like Google that result in zero change in the relevant markets. I wrote in a 2019 article:

There is a Sisyphean aspect to regulating power predicated on consumer choice: look no further than the European Union, where regulators are frustrated that remedies for the Google shopping case aren’t working, even though those same regulators were happy with the remedies in theory; the problem was trying to regulate consumer choice in the first place.

The premise of that Article is that effective regulation meant distinguishing between Aggregators and Platforms; drawing the distinction between delivery and demand is making the same point in a different way. Aggregators win by consolidating demand; platforms exert dominance by controlling distribution. Search results and social networks are the former; App Stores and access-control are the latter. Not understanding the difference is, as both AT&T and Verizon have learned, exceptionally costly.

  1. I am, for purposes of this article, going to focus on, not AWS, although all of the same principles apply. 

Cloudflare on the Edge

Matthew Prince, at the end of his prepared remarks after Cloudflare’s recent earnings report, related a story from the company’s earliest days:

Back in 2010, right before Cloudflare’s first Board meeting and our launch, I got some advice from one of our early investors. He said running a company is a bit like flying an airplane. You want to make sure it’s well maintained at all times. And that when you’re flying, you keep the wheel steady and the nose 10 degrees about the horizon. That’s stuck with me, and we’ve designed Cloudflare for consistent and disciplined execution. That shows in quarters like the one we just had.

What is most important of all, though, is the destination that airplane is headed for.

TechCrunch Disrupt

The launch Prince referred to happened at TechCrunch Disrupt 2010; the entire video is worth a watch, but there are three highlights in particular. First, Prince — despite a three-minute technical delay — did an excellent job of laying out Cloudflare’s core value proposition:

Prince, a graduate of Harvard Business School, explicitly invoked HBS Professor Clayton Christensen while answering a question about competition:

The most memorable moment of the presentation, though, was Prince’s response to a seemingly anodyne question about when companies might grow out of Cloudflare’s offering:

Despite the audacity of Prince’s answer — Our vision is that we’re going to power the Internet — the company’s list of competitors in its 2019 S-1 seemed rather aspirational, in both breadth and scale:

Our current and potential future competitors include a number of different types of companies, including:

  • On-premise hardware network vendors, such as Cisco Systems Inc., F5 Networks, Inc., Check Point Software Technologies Ltd., FireEye, Inc., Imperva, Inc., Palo Alto Networks, Inc., Juniper Networks, Inc., and Riverbed Technology, Inc.;
  • Point-cloud solution vendors, including cloud security vendors such as Zscaler, Inc. and Cisco Systems Inc. through Umbrella (formerly known as OpenDNS), content delivery network vendors such as Akamai Technologies, Inc., Limelight Networks, Inc., Fastly, Inc., and Verizon Communications Inc. through Edgecast, domain name system vendors services such as Oracle Corporation through DYN, NeuStar, Inc., and UltraDNS Corporation, and cloud SD-WAN vendors; and
  • Traditional public cloud vendors, such as, Inc. through Amazon Web Services, Alphabet Inc. through Google Cloud Platform, Microsoft Corporation through Azure, and Alibaba Group Holding Limited through Alibaba Cloud.

The first two categories make sense; after all, Cloudflare’s value proposition from the beginning was speed and security, so of course they would grow up to compete with network and security vendors. It was that last bullet point, though, that even now leads to raised eyebrows: Cloudflare’s big quarter entailed $138 million in revenue; AWS, over the same period, made $150 million a day.

Cloudflare Disrupt

To understand why Cloudflare sees public cloud vendors as competitors it helps to go back to what made Cloudflare disruptive; Christensen wrote in The Innovator’s Dilemma:

Occasionally, however, disruptive technologies emerge: innovations that result in worse product performance, at least in the near-term. Ironically, in each of the instances studied in this book, it was disruptive technology that precipitated the leading firms’ failure. Disruptive technologies bring to a market a very different value proposition than had been available previously. Generally, disruptive technologies underperform established products in mainstream markets. But they have other features that a few fringe (and generally new) customers value. Products based on disruptive technologies are typically cheaper, simpler, smaller, and, frequently, more convenient to use.

That was basically Prince’s value proposition: Cloudflare’s CDN would be cheaper (free), simpler (just change DNS servers), smaller (only 5 servers to start), and more convenient (ridiculously easy!). And Cloudflare’s customers were definitely fringe:

What Cloudflare had in its favor, though, was the most potent advantage on the Internet: the service, much like Google a decade-earlier with its link-based ranking system, got better with use. This was because Cloudflare paired its content delivery network with DDoS protection; the latter was extremely attractive to websites, gave Cloudflare an in with ISPs who valued the protection to build point-of-presence servers around the world, and, critically, gave Cloudflare better-and-better data about how data flowed around the world (improving its service) even as it improved its CDN capabilities.

Cloudflare’s focus on security-for-free also meant its CDN was built on general-purpose hardware from the beginning; from the S-1:

To achieve the level of efficiency needed to compete with hardware appliances required us to invent a new type of platform. That platform needed to be built on commodity hardware. It needed to be architected so any server in any city that made up Cloudflare’s network could run every one of our services. It also needed the flexibility to move traffic around to serve our highest paying customers from the most performant locations while serving customers who paid us less, or even nothing at all, from wherever there was excess capacity.

As time went on those general purpose machines were used for more-and-more offerings beyond a CDN and DDoS protection; HHHypergrowth has a fantastic overview of everything Cloudflare is working on, and the article is daunting in length because Cloudflare’s portfolio is so vast. It is Cloudflare Workers, though, that are responsible for the big cloud players being in Cloudflare’s competitive set.

Cloudflare Workers

Cloudflare launched Workers seven years after the company’s launch at Disrupt; from the introductory blog post:

Cloudflare is about to go through a similar transition [as programmable CPUs]. At its most basic level, Cloudflare is an HTTP cache that runs in 117 locations worldwide (and growing). The HTTP standard defines a fixed feature set for HTTP caches. Cloudflare, of course, does much more, such as providing DNS and SSL, shielding your site against attacks, load balancing across your origin servers, and so much else.

But, these are all fixed functions. What if you want to load balance with a custom affinity algorithm? What if standard HTTP caching rules aren’t quite right, and you need some custom logic to boost your cache hit rate? What if you want to write custom WAF rules tailored for your application?

You want to write code.

We can keep adding features forever, but we’ll never cover every possible use case this way. Instead, we’re making Cloudflare’s edge network programmable. We provide servers in 117+ locations around the world — you decide how to use them.

Workers were extremely limited in functionality to start; just a bit of stateless Javascript code running in a V8 isolate, but as close to users as possible. In 2018 Cloudflare added a key-value store, giving Workers access to highly distributed eventually-consistent data storage; in 2020 the company introduced Workers Unbound, dramatically expanding Workers capabilities, and Durable Objects, which not only store data but also state, which means a single source of truth. Once again Cloudflare’s network comes to the rescue:

When using Durable Objects, Cloudflare automatically determines the Cloudflare datacenter that each object will live in, and can transparently migrate objects between locations as needed. Traditional databases and stateful infrastructure usually require you to think about geographical “regions”, so that you can be sure to store data close to where it is used.

Thinking about regions can often be an unnatural burden, especially for applications that are not inherently geographical. With Durable Objects, you instead design your storage model to match your application’s logical data model. For example, a document editor would have an object for each document, while a chat app would have an object for each chat. There is no problem creating millions or billions of objects, as each object has minimal overhead.

In Cloudflare’s example of a chat app, every individual conversation is an object, and that object is moved as close to the participants as possible; two people chatting in the U.S. would utilize a Durable Object in a U.S. data center, for example, while two in Europe would use one there. There is a bit of additional latency, but less than there might be with a centralized cloud provider. That’s ok, though, because the real advantage of Workers isn’t what Cloudflare thought it was.

Public Cloud Economics

The economics of public clouds are very straightforward: it makes far more sense for Amazon or Microsoft or Google to build and maintain data centers all over the world and rent out capacity than it does for companies for whom data centers are not their core competency to duplicate their efforts at a sub-scale level. It’s so compelling I labeled the current state The End of the Beginning:

This last point gets at why the cloud and mobile, which are often thought of as two distinct paradigm shifts, are very much connected: the cloud meant applications and data could be accessed from anywhere; mobile made the I/O layer available anywhere. The combination of the two make computing continuous.

A drawing of The Evolution of Computing

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.

While this view of the omnipresent cloud is true for end users, the story is a bit more complicated for developers; if you want to set up a new instance you need to first select a region. AWS, for example, has twenty-five regions around the world:

AWS regions

Once you choose a region your actual app is geographically contained in that region. In theory that limitation gives an advantage to Cloudflare Workers; Prince wrote in a blog post:

Since we’re unlikely to make the speed of light any faster, the ability for any developer to write code and have it run across our entire network means we will always have a performance advantage over legacy, centralized computing solutions — even those that run in the “cloud.” If you have to pick an “availability zone” for where to run your application, you’re always going to be at a performance disadvantage to an application built on a platform like Workers that runs everywhere Cloudflare’s network extends.

The truth, though, is that this performance doesn’t matter very much for most applications. Stratechery’s podcast service runs in the US East (Ohio) region, for example, and it doesn’t really make a difference for me, despite the fact I’m halfway around the world. Price admitted as such:

But let’s be real a second. Only a limited set of applications are sensitive to network latency of a few hundred milliseconds. That’s not to say under the model of a modern major serverless platform network latency doesn’t matter, it’s just that the applications that require that extra performance are niche…People who talk a lot about edge computing quickly start talking about IoT and driverless cars. Embarrassingly, when we first launched the Workers platform, I caught myself doing that all the time.

Indeed, for almost all applications the public clouds were good enough, and again, the economics made any other choice a bad idea.

The Edge Opportunity

Earlier this year, in the wake of January 6, I wrote Internet 3.0 and the Beginning of (Tech) History; after raising the arguments from The End of the Beginning I noted:

In the case of the Internet, we are at the logical endpoint of technological development; here, though, the impasse is not the nature of man, but the question of sovereignty, and the potential re-liberation of megalothymia is the likely refusal by people, companies, and countries around the world to be lorded over by a handful of American giants.

As long as economics were all that mattered, we would only ever have the centralized cloud providers; the “limited set of applications” that needed minimal latency could pay a bit more to run on those blue AWS edge providers in the maps above. The point of that article, though, is that economics weren’t the only thing that mattered: going forward politics would be even more important.

Prince had the same realization; the blog post I have been quoting is entitled The Edge Computing Opportunity: It’s Not What You Think, and the chief benefits Prince cites are very much about politics:

Most computing resources that run on cloud computing platforms, including serverless platforms, are created by developers who work at companies where compliance is a foundational requirement. And, up until to now, that’s meant ensuring that platforms follow government regulations like GDPR (European privacy guidelines) or have certifications providing that they follow industry regulations such as PCI DSS (required if you accept credit cards), FedRamp (US government procurement requirements), ISO27001 (security risk management), SOC 1/2/3 (Security, Confidentiality, and Availability controls), and many more.

But there’s a looming new risk of regulatory requirements that legacy cloud computing solutions are ill-equipped to satisfy. Increasingly, countries are pursuing regulations that ensure that their laws apply to their citizens’ personal data. One way to ensure you’re in compliance with these laws is to store and process data of a country’s citizens entirely within the country’s borders.

The EU, India, and Brazil are all major markets that have or are currently considering regulations that assert legal sovereignty over their citizens’ personal data. China has already imposed data localization regulations on many types of data. Whether you think that regulations that appear to require local data storage and processing are a good idea or not — and I personally think they are bad policies that will stifle innovation — my sense is the momentum behind them is significant enough that they are, at this point, likely inevitable. And, once a few countries begin requiring data sovereignty, it will be hard to stop nearly every country from following suit.

This potential reality presents a big problem for Amazon, Microsoft, and Google: what scales on their side is the cloud as a whole, from management to interface to purchasing; individual developers are meant to stay in their regions. Yes, all three companies guarantee that data in one region won’t go elsewhere, but it’s a development nightmare: you have to maintain different apps with different data stores in different regions.

Cloudflare, meanwhile, can use the same capabilities that seamlessly transfer Durable Objects to the nearest data center, to follow local compliance data sovereignty laws at a granual level; from an announcement for Jurisdictional Restrictions for Durable Objects:

Durable Objects, currently in limited beta, already make it easy for customers to manage state on Cloudflare Workers without worrying about provisioning infrastructure. Today, we’re announcing Jurisdictional Restrictions for Durable Objects, which ensure that a Durable Object only stores and processes data in a given geographical region. Jurisdictional Restrictions make it easy for developers to build serverless, stateful applications that not only comply with today’s regulations, but can handle new and updated policies as new regulations are added…

By setting restrictions at a per-object level, it becomes easy to ensure compliance without sacrificing developer productivity. Applications running on Durable Objects just need to identify the jurisdictional rules a given Object should follow and set the corresponding rule at creation time. Gone is the need to run multiple clusters of infrastructure across cloud provider regions to stay compliant — Durable Objects are both globally accessible and capable of partitioning state with no infrastructure overhead.

Durable Objects are not, in-and-of-themselves, going to kill the public clouds; what they represent, though, is an entirely new way of building infrastructure — from the edge in, as opposed to the data center out — that is perfectly suited to a world where politics matters more than economics.

Internet 3.0

I actually already covered Cloudflare’s differentiated approach, albeit in passing, and by accident. Back in March, I interviewed Prince in the process of writing Moderation in Infrastructure; one thing that stood out to me was how his response to Internet fragmentation differed from Microsoft President Brad Smith, and Google Cloud CEO Thomas Kurian:


I think, it’s a reflection of the fact that if you’re a global technology business, most of the time, it is far more efficient and legally compliant to operate a global model than to have different practices and standards in different countries, especially when you get to things that are so complicated. It’s very hard to have content moderators make decisions about individual pieces of content under one standard, but to try to do it and say, “Well, okay, we’ve evaluated this piece of content and it can stay up in the US but go down in France.” Then you add these additional layers of complexity that add both cost and the risk of non-compliance which creates reputational risk.


So far, we have tried to get to what’s common, and the reality is, Ben, it’s super hard on a global basis to design software that behaves differently in different countries. It is super difficult. And at the scale at which we’re operating and the need for privacy, for example, it has to be software and systems that do the monitoring. You cannot assume that the way you’re going to enforce ToS and AUPs is by having humans monitor everything, I mean we have so many customers at such a large scale. And so that’s probably the most difficult thing is saying virtual machines behave one way in Canada, and a different way in the United States, and a third way…I mean that’s super complicated.


Everywhere in the world, governments have some political legitimacy, and they certainly have a lot more political legitimacy than I do…It’s important that we comply with the laws in each jurisdiction in which we operate. We should help our customers comply with the laws in each jurisdiction we operate…Germany can set whatever rules they want for Germany, but it has to be the rules inside of Germany.

And you can manage that okay. You can manage on a per country basis. You feel good about that?

Sure. I mean, for us, that’s easy. And then we can provide that to our customers as a function of what we’re doing. But I think that if you could say, German rules don’t extend beyond Germany and French rules don’t extend beyond France and Chinese rules don’t extend beyond China and that you have some human rights floor that’s in there.

Right. But given the nature of the internet, isn’t that the whole problem? Because, anyone in Germany can go to any website outside of Germany.

That’s the way it used to be, I’m not sure that’s going to be the way it’s going to be in the future. Because, there’s a lot of atoms under all these bits and there’s an ISP somewhere, or there’s a network provider somewhere that’s controlling how that flows and so I think that, that we have to follow the law in all the places that are around the world and then we have to hold governments responsible to the rule of law, which is transparency, consistency, accountability. And so, it’s not okay to just say something disappears from the internet, but it is okay to say due to German law it disappeared from the internet. And if you don’t like it, here’s who you complain to, or here’s who you kick out of office so you do whatever you do. And if we can hold that, we can let every country have their own rules inside of that, I think that’s what keeps us from slipping to the lowest common denominator.

The quotes aren’t perfectly comparable — you can read the full interviews to get the context — but it makes sense that Microsoft and Google (and presumably Amazon) would be very concerned about a world where individual countries make their own laws about what can be put on the Internet, or even seen. Theirs are services predicated on the superior economics that come from centralization; Cloudflare, on the other hand, is already doing all of its computing on the edge — data sovereignty rules are simply a variable. It’s “easy”.

This is why the direction of Cloudflare’s metaphorical plane is so fascinating: Cloudflare’s current addressable market of enterprise security and networking is significant, particularly as remote work has laid bare the problems with traditional approaches; the destination with outsized upside, though, is Internet 3.0, and the resultant need for a service that routes around obstacles, not from nuclear war, but sovereign governments.1

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

  1. As I explained last week, I use “Internet 3.0” instead of Web3 because the world beyond centralization isn’t only going to be about crypto; Cloudflare’s potential is a great example. 

Market-Making on the Internet

Two months ago I bemoaned how Web 2.0 had failed to live up to its promise in one crucial area; from The Web’s Missing Interoperability:

[From] the Wikipedia…definition:

Web 2.0…refers to websites that emphasize user-generated content, ease of use, participatory culture and interoperability (i.e., compatible with other products, systems, and devices) for end users.

Seventeen years on and there is more user-generated content than ever, in part because it is so easy to generate: you can type an update on Facebook, post a photo on Instagram, make a video on TikTok, or have a conversation on Clubhouse. That, though, points to Web 2.0’s failure: interoperability is nowhere to be found.

The context for that piece was Twitter’s preview of Super Follows, acquisition of Revue, and imminent launch of Spaces, all of which helped explain how centralization had won the web. Twitter’s latest acquisition, though, leverages centralization in a way that bodes well for realizing the “thousand flowers bloom” vision of Web 2.0.

Web 2.0 and the Aggregators

The first page of O’Reilly’s definition of 2.0 had a “Web 2.0 Meme Map”:

The Web 2.0 Meme Map from O'Reilly

Don’t worry about the low resolution and tiny type; what should feel familiar is this idea of an interlocking web of properties and services between which a user could flit to and fro, tying their content and data together with links. It turned out, though, that centralized services offered better user experiences that gained them critical masses of users, drawing suppliers onto the service on the service’s terms, attracting more users in a virtuous cycle; meanwhile, by virtue of being centralized, the service could gather better data about its users and offer a one-stop shop for advertisers. Aggregation Theory, in other words.

Aggregation was the antithesis of the Web 2.0 promise; the best suppliers could do was either subject themselves to the Aggregator’s terms and try and make the best of it (call it the BuzzFeed strategy) or work to build a direct connection with customers that went around the Aggregators (the New York Times strategy); Twitter, though, may be on the verge of offering a middle path: market-making.

Ad Agencies

Market-making in media isn’t a new concept; perhaps the best example is the traditional advertising agency. I explained back in 2017’s Ad Agencies and Accountability:

Few advertisers actually buy ads, at least not directly. Way back in 1841, Volney B. Palmer, the first ad agency, was opened in Philadelphia. In place of having to take out ads with multiple newspapers, an advertiser could deal directly with the ad agency, vastly simplifying the process of taking out ads. The ad agency, meanwhile, could leverage its relationships with all of those newspapers by serving multiple clients:

A drawing of The Pre-Internet Ad Agency Structure

It’s a classic example of how being in the middle can be a really great business opportunity, and the utility of ad agencies only increased as more advertising formats like radio and TV became available. Particularly in the case of TV, advertisers not only needed to place ads, but also needed a lot more help in making ads; ad agencies invested in ad-making expertise because they could scale said expertise across multiple clients.

In this case the ad agencies gave a single point of contact for advertisers on one side, and ad inventory sellers on the other, creating a market.

That was then, though; aggregation has been terrible for ad agencies for the same reason it has been bad for publishers: the more that advertising becomes centralized on Facebook and Google, whether on their sites or on programmatic exchanges, the fewer advertising dollars are available for the inventory that ad agencies used to abstract away for clients. And, as I noted in that article:

A drawing of The Post-Internet Ad Agency Structure

That’s a problem for the ad agencies: when there are only two places an advertiser might want to buy ads, the fees paid to agencies to abstract complexity becomes a lot harder to justify.

In this world, the more effective of the two strategies I noted above has clearly been the New York Times model, at least for the New York Times and its 7.5 million subscribers; Visual Capitalist put together this striking infographic last week showing how the New York Times dominated the subscription market (click through to see a veritcal version of the infographic that shows every publication listed):

An inforgraphic of news websites ranked by subscriptions
Licensed from Visual Capitalist

The problem is that there are a lot of publications in the world that would like to be supported by subscriptions, and a lot of readers in the world that would prefer to pay for ad-free content, but nobody is making a market. This is where Twitter is making its play.

Twitter Buys Scroll

From the Scroll blog:

Twitter is acquiring Scroll. The service will be going into private beta as we integrate into a broader Twitter subscription later in the year. We’re very excited!

Since launch last year, Scroll has proven that there’s a model that gives consumers a better experience and journalists a better future. Today when Scroll members visit hundreds of top sites like The Atlantic, The Verge, USA Today, The Sacramento Bee, The Philadelphia Inquirer or The Daily Beast, they get a site that feels built solely for them: a blazing fast experience that loads with no ads, no dodgy trackers and no chumboxes of clickbait. At the same time, publishers get to deliver a site that increases engagement and makes them more money than they would make from ads. It’s a better internet and we’ve proven the model works.

I’ve been a subscriber to Scroll for some time now, and it’s a great experience: while ad-blockers are oppositional to publishers, blocking their trackers and advertisements while users take content they refuse to help monetize, Scroll partnered with publications directly, such that Scroll subscribers were never served ads in the first place. Publishers would instead get paid their usage-based share of the Scroll user’s subscription fee, which Scroll claimed was more than a publication would have made by serving that user ads.

Scroll’s list of partner sites has been scrubbed from their website, but I recall it being pretty impressive; the real challenge for the startup, though, was acquiring users, which is the first reason why Twitter is a great match: Twitter not only has 199 million monetizable daily active users, but is also one of the places where users are most likely to click-through to publications.

Twitter between publishers and readers

Now imagine this model, but with Scroll’s business model on top:

Twitter using Scroll to monetize publishers

This is a great example of market-making in action: Twitter is taking its user base, which no one publication could realistically reach or monetize on its own, and re-distributing their subscription fee across publications that no one user could ever support individually.

This doesn’t necessarily mean that every publication will buy in; the New York Times, to take an obvious example, is doing quite well on its own, as are sovereign writers. Twitter, though, because of its outsized role in driving traffic to sites across the web, is uniquely positioned to bundle everything else together. Moreover, there are, as they say levels to this: Twitter could offer one price tier for no ads, and another price tier for getting past paywalls, and perhaps even individual site subscriptions above that.

Multi-Medium Creators

Spotify’s announcement last week, meanwhile, shows that markets need not be exclusive. Start with creators: today someone might build a following on Instagram, before branching out to YouTube or TikTok, much as an artist may have started out singing and ended up making movies. Today this ability to move across mediums extends down to even the smallest creators: even Stratechery is multi-medium, with text available on the web or via email, and podcasts on your phone.

What is new is that the business model can be more than fame (and, naturally, advertising). Subscriptions work for creators just as well as they do for publications (arguably better given an individual creator’s cost structure), but to-date that has meant that creators were limited to mediums that they could fully control — i.e. text and podcasts — and only on the open web; what Spotify made clear is that they want into this world. From 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.”

In this case Spotify isn’t market-making: rather, it is recognizing that creators are going to want to make their own markets, pulling their fans from medium to medium and service to service, and they want to make sure they are plugged in to that:

The creator carrying audiences to different mediums

What is neat about markets is that they create the conditions for win-win outcomes; Spotify aligning with creators doesn’t hurt Spotify’s core business, it enhances it by making sure Spotify’s podcast service is as complete as it can be. Critically, it does this not by fighting over users, but rather by linking them.

Spotify existing in harmony with creators

This is the part that Web 2.0 got wrong; much like the Facebook model of social networking emphasized being your whole self, Web 2.0 assumed that your one identity would connect together the different pieces of your web existence. However, just as the future of social networking is about different identities for different contexts, interoperability via markets is about linking together distinct user bases in a way that is appropriate for different services, all under the control of the user who is paying for the privilege.

Shopify and Platforms

The other place where market-making might seem familiar is that most classic of tech concepts: platforms. I wrote in 2019’s Shopify and the Power of Platforms, in the context of the e-commerce service’s planned foray into logistics:

Notice, though, that Shopify is not doing everything on their own: there is an entire world of third-party logistics companies (known as “3PLs”) that offer warehousing and shipping services. What Shopify is doing is what platforms do best: act as an interface between two modularized pieces of a value chain.

A drawing of Shopify as an Interface

On one side are all of Shopify’s hundreds of thousands of merchants: interfacing with all of them on an individual basis is not scalable for those 3PL companies; now, though, they only need to interface with Shopify.

The same benefit applies in the opposite direction: merchants don’t have the means to negotiate with multiple 3PLs such that their inventory is optimally placed to offer fast and inexpensive delivery to customers; worse, the small-scale sellers I discussed above often can’t even get an audience with these logistics companies. Now, though, Shopify customers need only interface with Shopify.

What makes the Shopify platform so fascinating is that over time more and more of the e-commerce it enables happens somewhere other than a Shopify website. Shopify, for example, can help you sell on Amazon, and in what will be an increasingly important channel, Facebook Shops. In the latter case Facebook and Shopify are partnering to create a fully-integrated market: Facebook’s userbase and advertising tools on one side, and Shopify’s e-commerce management and seller base on the other. The broader takeaway, though, is that Shopify’s real value proposition is working across markets, not creating an exclusive one.

Market-Making and Aggregators

Market-making is certainly a characteristic of Aggregators; Google, for example, is a one-stop shop for users, advertisers, and content suppliers. What makes Aggregators unique, though, is their infinite scalability, driven by the effectively zero marginal and transactional costs necessary to serve one more user, advertiser, or supplier. This characteristic, by necessity, reduces everything to a commodity. In contrast, the commonality between what Twitter appears to be building, the phenomenon that Spotify is seeking to plug into, and Shopify and e-commerce is the inherent friction of transferring money (usually via Stripe), for something that is not flattened, but differentiated.

Some of these plays are certainly more Aggregator-like — Twitter/Scroll appears likely to (non-exclusively) abstract away publishers from subscribers — but I think the distinction from advertiser-driven Super Aggregators is a notable development, and an exciting one. The web started with no economy, then built a commoditized advertising-only one, and now is increasingly a market for all sorts of goods and services — the more differentiated the better. That doesn’t just mean interoperability, in the purest most fungible form of money, but also opportunity.

Spotify’s Surprise

This Article is a follow-up in two ways:

Plus, a special announcement about Exponent.

Anchor Subscriptions

Spotify’s first announcement was teased during its Stream On event last month: paid podcasts via Anchor.

The first implication of this is exactly what you might expect: podcasters who use Spotify’s Anchor service for hosting their podcasts can now create subscriber-only podcasts on Spotify. At first glance this seems similar to Apple’s offering: use their subscription service to offer paid podcasts on their app. However, Anchor is different in three important ways:

On-Web versus In-App

First, subscribing to an Anchor show on Spotify is a clumsier process than it is on Apple; note these images from the announcement:

Spotify's subscription podcast screen

Subscribing via Anchor

Spotify can’t put a “Subscribe” button in its app due to Apple’s App Store rules, which means that Anchor podcasters have to hope a would-be subscriber finds their way to the Anchor website.1 Apple, meanwhile, can put a subscribe button front-and-center:

Apple's subscription screen

This is, needless to say, a rather stark example of Apple leveraging its control of the App Store to give itself an advantage in a new market; the obvious analogy is Apple Music, which has the same advantage relative to Spotify itself. Spotify filed a complaint to the EU two years ago, and the EU is expected to charge Apple with anti-competitive behavior this week.


Second, Anchor is charging less than Apple is; the announcement states:

For the next two years, this program will come at no cost to the creator, meaning that participating creators receive 100% of their subscriber revenues (excluding payment transaction fees). Starting in 2023, we plan to introduce a competitive 5% fee for access to this tool.

That “excluding payment transaction fees” is a pretty important parenthetical; here is what the take-home amount is for $5/month and $10/month podcasts on both Anchor and Apple Podcasts:

$5/month $10/month
Anchor now $4.55 $9.41
Anchor 2023+ $4.31 $8.91
Apple Year One $3.50 $7.00
Apple Year Two $4.25 $8.50

These aren’t directly comparable:

  • Anchor’s rates are the same for all subscribers; all $5 subscriptions earn $4.55 in 2021 and 2022, and then earn $4.31 in 2023, no matter if the subscriber signed up in 2021 or 2023.
  • Apple’s “Year One” and “Year Two” rates apply to subscribers, not podcasts; even if your podcast has been available for two years, for example, new subscribers pay out at the 70/30 rate for the first year they are subscribed.

That caveat is an important one, because after 2023 rates for long-time subscribers are more comparable than you might expect.

The Open Podcast Ecosystem

This was the first big surprise in the announcement; from Anchor’s blog post (emphasis mine):

The most seamless discovery, subscription, and listening experience for your audience equals increased earning potential for you. It starts with a straightforward subscription process for listeners that immediately gets access to paid episodes within your existing show feed in Spotify, meaning less friction and more supporters; your audience won’t need to contend with RSS feeds or downloading a separate third-party app to listen. They’ll still have the option of listening on the platform of their choosing through a private RSS feed, so you don’t lose out on any potential subscribers. And with paid subscription content clearly marked on your show and episode pages in Spotify, listeners can easily see how to support you directly, thus presenting a bigger potential paid audience.

Yes, most of this paragraph is about the Spotify experience, but that sentence is a huge deal to the open podcast ecosystem: all Anchor subscriptions will include per-subscriber private RSS feeds so that you can listen to the podcast you paid for in the app of your choosing — it’s not locked to Spotify. That’s exactly how the Stratechery podcast and Dithering work; I explained last year:

HTTP and SMTP, though, are not the only open protocols available to publishers: RSS is another, and it is the foundation of the podcast ecosystem. Most don’t understand that podcasts are not hosted by Apple, but rather that iTunes is a directory of RSS feeds hosted on servers all over the Internet. When you add a podcast to your podcast player, you are simply adding an RSS feed that includes information about the show, and a link for where to download new episodes.

iTunes is only a directory

This, if you squint, looks a lot like email: create something that listeners find valuable on an ongoing basis, and deliver it into a feed they already check, i.e. their existing podcast player. That is Dithering: while you have to pay to get a feed customized to you, that feed can be put in your favorite podcast app, which means Dithering fits in with the existing open ecosystem, instead of trying to supplant it.

The implications of this are fascinating: you can not only listen to an Anchor podcast in Spotify, or an independent podcast player like Overcast, you can even listen to it in Apple Podcasts; I posted this image last week:

Adding a podcast by URL

I expressed concern on Dithering about whether or not Apple would shut off the ability to add arbitrary RSS feeds in order to force creators to use their subscription offering; I hope not, as it would be shutting off Apple Podcasts from the open web even as Spotify is embracing it.

Whose Customers?

As I previously explained when writing about Spotify, I have multiple perspectives on podcasts: the first is my role as analyst, the second is my role as publisher, and the third is my role as a podcaster.

When it comes to Apple, Analyst Ben thinks that Apple’s Podcast Subscription service makes a lot of sense, and is a good example of how Apple can compete on the user experience; Podcaster Ben, meanwhile, would prefer to have my shows everywhere. Publisher Ben, though, has one big hangup when it comes to Apple’s offering:

As I noted above, I’m actually very open to allowing Apple to be my payment processor; in my experience, though, a critical part of the creator business model is having a direct connection with your customers. That is something Apple simply doesn’t allow. From the Podcasters Program Agreement:

Personal Data. In connection with any Podcaster Content hosted by Apple and made available in Apple Podcasts under this Agreement, You represent and warrant that You and Your personnel, agents, and contractors will not access or otherwise process any information that can be used to uniquely identify or contact an individual (“Personal Data”).

This makes it crystal clear that every subscriber that signs up is Apple‘s customer, not mine, and while the revenue may be nice in the short run, it is fundamentally constraining in the long run. I believe that creators will increasingly monetize across apps and experiences; Apple, though, won’t even let me email folks to let them know about what is happening beyond the podcast.

Anchor says it plans to be better in this regard, promising to add “email subscriber” functionality specifically; that’s a good start, but it’s important to note that when it comes to money the subscribers are ultimately Anchor’s, not the publishers. Publisher Ben isn’t too happy about that.

The Spotify Open Access Platform

This was the second big surprise, and full disclosure, it affects me personally, and in a very positive way. From the announcement:

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 am in fact a creator or publisher who has subscribers elsewhere! That’s my entire frustration with Apple and Anchor’s offerings, and why Publisher Ben was so opposed to Spotify’s moves in podcasting, even as Analyst Ben thought they were a great idea; from a Daily Update last year:

Analyst Ben says it is a good idea for Spotify to try and be the Facebook of podcasting…Podcaster Ben certainly sees the allure: having my podcast available to Spotify’s 271 million monthly active users would be great.

Publisher Ben, though, remembers that my business model is predicated on a higher average revenue per user (thanks to subscriptions), not a higher number of users; that means making tradeoffs, and foregoing wide reach is one of them. That, by extension, means not agreeing to Spotify’s terms for Exponent, and accepting that leveraging RSS to have per-subscriber feeds makes having the Daily Update Podcast on Spotify literally impossible. More broadly, owning my own destiny as a publisher means avoiding Aggregators and connecting directly with customers.

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.”

Needless to say, Publisher Ben is very happy about this news, and Podcaster Ben is excited to have his work available everywhere. Analyst Ben, though, is pleased as well: Spotify isn’t simply ensuring it has all of audio on its app, it is also sending a powerful signal to creators of all types that their corporate incentives are aligned with what matters to creators.

Spotify’s Facebook Play

While most of Spotify’s announcement was devoted to their new subscriptions offerings, the company also announced that the Spotify Audience Network was now available to podcasts hosted on Megaphone (which Spotify acquired last year) and Anchor (on May 1st). This is the Facebook play I was referring to: Spotify wants to accumulate the most podcast listeners and construct a self-serve ad market place that delivers personalized ads at scale.

Again, Analyst Ben thinks this is smart, but shouldn’t Publisher Ben still be a bit nervous about an Aggregator in my space? Not at all — in fact, Twitter and Facebook are great for Stratechery; if your business is based on word-of-mouth, then giving your readers a voice is nothing but upside. And, while I have never advertised Stratechery, Facebook and Twitter would be the obvious — and most accessible — choices if I did (and don’t underrate LinkedIn). I would never use a Twitter or Facebook subscription product — see the part above about owning my users — but that’s ok, because the web is an open alternative.

And, now that Spotify has fixed the openness problem, I see upside in their approach; it will actually be easier to have a mix of free and paid feeds than it is with custom private RSS feeds, which means a new customer acquisition channel, while the Spotify Audience Network might be the first podcast advertising product that is easily accessible for smaller podcasts. Facebook and Twitter would do well to reconsider their subscription plans to accommodate independent creators like Spotify has, instead of trying to capture them (and Apple too, but I’m not holding out hope).

An Exponent Announcement

I apologize if the Analyst/Publisher/Podcast Ben nomenclature was a bit over-the-top; the reality is that writing about Spotify has always been a bit more fraught than most other companies given that it affects my business, and I wanted to be open about that. I have tried, though, to practice what I preach: that is why James Allworth and I made the decision to remove the Exponent podcast we co-host from Spotify. Yes, Exponent is free, but every listener on Spotify was one I couldn’t convert to a customer as an independent creator, which meant saying no to the would-be Aggregator’s audience.

It’s important to point out that the foundation of the Spotify Audience Network is Streaming Ad Insertion on Spotify itself,2 which, as the name suggests, depends on Spotify’s streaming infrastructure being far more capable and flexible than downloadable MP3s served over RSS. That’s why I wasn’t necessarily mad at Spotify for not supporting private RSS feeds: they made their decision for business reasons, and I made mine.

That, though, is why advocates of the open podcast ecosystem should be pleased with Spotify’s adoption of OAuth: there are good reasons that the company will never support private RSS feeds, but when there is a will there is a way, and Spotify has shown the will to support openness and independent creators. To that end, Exponent has an announcement:

Here’s hoping other Aggregators follow Spotify’s lead.

  1. Note the link in show notes: show notes are a part of the podcast, not the Spotify app, which means that it should be excluded from Apple’s ban on linking to the web for digital content subscriptions. After all, the link was placed by the podcaster over the web, not Spotify via its app. 

  2. Ads served on Megaphone are inserted on download 

Podcast Subscriptions vs. the App Store

There was a bit of a brouhaha a couple of weeks ago when Senators Amy Klobuchar and Mike Lee sent a letter to Apple accusing the company of failing to provide a witness for the App Store-focused antitrust committee hearing that is happening later today; Apple responded that it was all a misunderstanding due to a scheduling conflict. From Bloomberg:

“We have deep respect for your role and process on these matters and, as we told your staff, we are willing to participate in a hearing in the subcommittee,” Apple said. “We simply sought alternative dates in light of upcoming matters that have been scheduled for some time and that touch on similar issues.”

It seems likely that Apple was referring to Epic’s lawsuit against Apple and its App Store policies, which goes to trial on May 3rd; the Senators’ letter said as much. The fact this hearing is the day after an Apple event, though, is notable in its own right, given how Apple itself just highlighted where the App Store goes wrong.

iTunes 4.9

Apple Podcasts received 75 seconds of attention in Apple’s one hour and one minute presentation; it seems appropriate that 20 of those seconds were spent recounting Apple’s role in popularizing the format:

The 2005 release of iTunes 4.9 and the iTunes podcast directory was indeed a critical step in popularizing podcasts. I explained in 2017’s Podcasts, Analytics, and Centralization:

Centralization occurs in industry after industry for a reason: everyone benefits, at least in the short term. Start with the users: before iTunes 4.9 subscribing and listening to a podcast was a multi-step process, and most of those steps were so obscure as to be effective barriers for all but the most committed of listeners.

  • Find a podcast
  • Get a podcatcher
  • Copy the URL of the podcast feed into the podcatcher
  • Copy over the audio file from the podcatcher into iTunes
  • Sync the audio file to an iPod
  • Listen to the podcast
  • Delete the podcast from the iPod the next time you synced

iTunes 4.9 made this far simpler:

  • Find a podcast in the iTunes Store and click ‘Subscribe’
  • Sync your iPod
  • Listen

Recounting this simplification may seem pedantic, but there is a point: this was the most important improvement for podcast creators as well. Yes, the iTunes Music Store offered an important new discovery mechanism, but it was the dramatic improvement to the user experience that, for the vast majority of would-be listeners, made podcasts even worth discovering in the first place. Centralized platforms win because they make things easier for the user; producers willingly follow.

And then Apple stopped. Yes, the iPhone happened, and podcast management and listening was further centralized into a single app, but given that Apple’s goal was only ever to sell more iPods (and then more iPhones) the company never pursued centralization to its logical conclusion:

Remember, the web was thought to be a wasteland for advertising until Google provided a centralized point that aggregated users and could be sold to advertisers. Similarly, mobile was thought to monetize even worse than the (desktop) web until Facebook provided a centralized point that aggregated users and could be sold to advertisers. I expect a similar dynamic in podcasts: the industry will remain the province of ads for web hosting and underwear absent centralization and aggregation, and the only entity that can accomplish that is Apple.

In fact, it was Spotify that identified the vacuum that Apple had created, aggressively expanding its podcasting business in an attempt to displace Apple’s Aggregator position; eMarketer predicts the streaming service will surpass Apple later this year in podcast listeners. Spotify is pursuing a multi-pronged strategy ranging from exclusive content to open podcast hosting to targeted advertising, and the company’s actions not only promise to dramatically increase podcast monetization but have also stirred Apple to action.

Podcast Subscriptions

The company’s initial response came in the remaining 55 seconds:

Paid podcasts are not a new concept; Stratechery launched a paid version of the Daily Update last February, and Dithering (where we covered Apple’s other product announcements this morning) last May. Both podcasts are predicated on the fundamentally open nature of RSS: every subscriber has a unique feed, which they can add to the podcast player of their choice, including Apple Podcasts (but not Spotify). It’s a little clumsy, but it works:

Apple’s solution looks far easier to use:

The company didn’t actually show the subscription flow in action, but it seems like a safe bet that it will operate similarly to an app subscription flow: hit a button, scan your face, and you’re good to go. Apple’s pricing is the same as apps as well: 30% for the first year of a subscription, and 15% after that.

As a longstanding | critic | of | the App Store, you might expect me to be scandalized by Apple’s podcast subscription offering…and you would be wrong! In fact, Apple’s podcast offering is an excellent example of how the App Store should operate (with one big exception).

What Podcast Subscriptions Gets Right

Apple’s podcast subscription offering gets four big things right, three of which are the complete opposite of the App Store.

A Great Customer Experience with Competitive Creator Economics

This is the part that podcast subscriptions share with the App Store: it really is a great customer experience, from purchase to subscription tracking to cancellations. This accrues to creators as well: increased customer trust means an increased conversion rate.

Second, because Apple controls the entire experience, they can offer things like trials, early access, or the wholesale substitution of ad-supported episodes with ad-free ones. Integration has value!

Third, while 30% is really high, 15% is extremely competitive; a $5/month podcast like Dithering loses 9% of that amount in credit card fees (2.9% + $0.30/charge), plus whatever amount is paid to the subscription management service. Add on the fact that the number one cause of churn is expired or lost credit cards and Apple’s offering — which is far more likely to have an up-to-date credit card attached — is more attractive than it seems.

Unfortunately everything else that I like about Apple’s offering is in stark contrast to the App Store.

Multiple Ways to Subscribe

Some creators may find 30% to be too much (along with the big problem detailed below), but that’s fine: you can still add arbitrary RSS feeds to Apple Podcasts, either via a deep-link like I demonstrated above, or from this screen:

Adding a podcast by URL

This means that creators have a choice, and that Apple has to win on the merits, and again, there is good reason to believe that Apple can do just that. And if they can’t win on the merits, perhaps they will have to lower their price, or increase the attractiveness of their offering. Competition is a good thing!

The App Store, unfortunately, has no alternative. All apps must be installed via the App Store, which Apple says is for security, but is in fact security theater; the primary reason why bad apps don’t mess up your phone is due to the way that iOS is designed. Theoretically the App Store could also protect you from scams, but that appears to be not much of a priority. And why should it be? There is no competition.

Easy Access to Alternative Payment Methods

Podcasts can contain show notes, and show notes can contain links; these links open in a podcast player’s webview (or in Safari). This is great for subscription-based podcasts: you can load a webview to manage your account, or add on a subscription to your members-only feed:

Once again, this is a fair bit clumsier than simply using Apple’s built-in purchase flows (although Apple Pay helps). That’s ok, though: Apple built the iPhone, and it’s reasonable to argue that they can leverage that advantage to have a superior purchasing experience.

Apps, though, can’t load a webview if there is even a hint of a payment option — apps can’t even include words that tell you to visit a website to subscribe. That means that Spotify or Kindle or any number of apps with digital content can do little more than provide users with a login screen, and keep their fingers crossed that users figure out how to sign up on the web on their own. This works for big names, to an extent, but it is much more difficult for smaller players.

There is no technical way that Apple can stop apps from linking to a webpage, of course; this provision is enforced by App Review, which somehow seems far more effective in figuring out how to navigate from a privacy policy on a web page to a purchase page (and subsequently rejecting the app) than it is in rooting out scams. Podcasts are in a much better place because they are based on open standards and the open web.

Availability of Alternative Podcast Players

It is possible that Apple shuts all of these avenues down. The company could end the possibility of adding arbitrary RSS feeds, and it could disable links in show notes. This would, to be clear, be an exceptionally crappy thing to do, but then again:

The good thing about podcasting is that even if Apple locks the Podcast app down, there are plenty of other podcast apps in the App Store, and most of them are free. Make no mistake, it would be bad for my business if I were shut out from Apple’s podcast app, but at least I would have a chance.

That chance doesn’t exist for developers. There are no alternatives to the App Store on the iPhone, and hoping that a customer spends hundreds of dollars and tens of hours switching to Android is completely unrealistic.

Two Big Problems

There does remain two big problems with Apple’s podcast subscription service:

Who Owns the Customer

As I noted above, I’m actually very open to allowing Apple to be my payment processor; in my experience, though, a critical part of the creator business model is having a direct connection with your customers. That is something Apple simply doesn’t allow. From the Podcasters Program Agreement:

Personal Data. In connection with any Podcaster Content hosted by Apple and made available in Apple Podcasts under this Agreement, You represent and warrant that You and Your personnel, agents, and contractors will not access or otherwise process any information that can be used to uniquely identify or contact an individual (“Personal Data”).

This makes it crystal clear that every subscriber that signs up is Apple‘s customer, not mine, and while the revenue may be nice in the short run, it is fundamentally constraining in the long run. I believe that creators will increasingly monetize across apps and experiences; Apple, though, won’t even let me email folks to let them know about what is happening beyond the podcast.

There is an even more problematic angle to this as well: I noted above that Apple might start locking down its podcast app, which might mean that I want to change to a different platform or monetization method. However, the fact I don’t know who my customers are will make that impossible to communicate.

I’m not, in the context of podcasts anyway, saying that what Apple is doing is illegal, and I acknowledge that many customers may prefer this arrangement. As a creator, though, this is a major red flag (developers, meanwhile, also get no contact, but they have no alternatives).

The Anticompetitive Angle

Apple’s podcast offering, as I laid out above, rightfully competes on the merits with alternative ways of paying for subscription podcasts in the Apple Podcast app. Unfortunately there is a meta competition problem, which is that no one else can offer a podcast subscription service like Apple’s.

Spotify is, of course, the other obvious candidate, and the streaming service is currently testing subscription podcasts via Anchor. However, when that product launches Spotify will not be able to upsell customers from within the Spotify app, like Apple is from within the Podcast app. Not because it is technically impossible, but because Apple is leveraging its control of the operating system into control of the App Store into control of apps and now podcast monetization.

Apple’s Flipped Motivations

To go back to yesterday’s presentation, the obvious reason why Podcasts only warranted a minute of Apple’s time is that the company had so many other cool things to announce:

  • AirTags and the anonymous iPhone network they tap into are something that only Apple could create, thanks to their integrated model.
  • The new iMac is gorgeous, and, as Apple was careful to point out, uniquely enabled by their industry-leading chips.
  • The latest iPads are full-blown computers in their own right, and even more capable in ways that creators are still figuring out.

Apple even released a great-looking new iPhone color, and finally fixed (?) the Apple Remote.

Then again, perhaps Apple spent so little time on podcasts for a rather less attractive reason: while iTunes 4.9 was created to make iPods better, the end game of all of these beautiful devices seems ever more focused on locking in services that make Apple richer; that’s a conversation better saved for Congress.